Gold price whirlwind: Herd mentality or price 'inflation'?

The main trend of the gold market in the past few days has been a vertical increase and then a sharp decline regardless of the world gold price movements. This is a rare phenomenon in the precious metal market in the past 3 years.

Crowd psychology

Illustration photo. Source: Internet

The Brexit shockwave has "blown up" the world and domestic gold markets. On June 24, domestic gold prices rose sharply and marked the highest level in 10 months. The gold fever peaked on July 6 and 7. Domestic precious metals reached VND37 million/tael after breaking the VND36 million mark last week. The trading session on July 6 brought a sense of surprise when the trading day opened, the gold price increased by VND1 million/tael compared to the previous session's close. Not stopping there, the gold price continued to be pushed up to the astonishment of investors when it blew away the VND39 million/tael mark and tended to approach the peak of VND40 million/tael, the highest price set since June 2013.

Confused by the multi-dimensional information, the market has formed a chaotic crowd mentality with "sellers and buyers". Gold traders said that although customers came in droves, transactions did not have any sudden changes, mainly small-scale hoarding transactions.

People's psychology is less affected by the increase in gold prices, reflected in the data on gold sales in the week after Brexit compared to the previous week, which increased slightly. However, from the afternoon of July 5, 2016 to July 6, 2016, domestic gold prices tended to increase faster than world gold prices and domestic gold prices were higher than world gold prices.

This development affects the psychology of the market, some people tend not to sell gold immediately to the market, causing a temporary shortage of supply. However, the volume of gold traded on the market did not increase suddenly, there was no situation of people lining up and rushing to buy gold like in previous periods.

On the evening of July 6, the State Bank of Vietnam (SBV) sent out a message that it had enough resources and was ready to intervene to stabilize the gold market. And after just one night, gold traders suffered heavy losses if they bought at the peak of the previous day because the gold price plummeted despite the world price.

Need to have a "cool head"

On July 6, the listed price of SJC gold at Saigon Jewelry Company at the opening was 37.45 - 38.15 million VND/tael (buy - sell) and the price of this precious metal closed at 38.7 - 39.7 million VND/tael (buy - sell). On July 7, when the gold price plummeted, those who bought gold at the peak suffered a loss of nearly 3 million VND/tael.

Mr. Nguyen Ngoc Canh, Director of the Foreign Exchange Management Department of the State Bank of Vietnam, commented that through monitoring the developments of the international and domestic gold markets, this agency found that the domestic gold price fluctuated in line with the increase in the world gold price. However, from after the Brexit event until the morning of July 5, 2016, the domestic gold price increased more slowly than the increase in the world gold price, so at many times the domestic gold price was lower than the world gold price (some days it was lower than 800 thousand VND/tael).

“Thus, the market fluctuations as mentioned above are only temporary fluctuations, without a clear trend. Multi-dimensional information from the world market has affected the domestic market psychology. Many experts have continuously warned investors and people to be cautious to avoid losses. Therefore, people need to be extremely careful in all their buying and selling decisions, avoiding unnecessary risks that cause damage to themselves like in the previous period,” the head of the Foreign Exchange Management Department affirmed.

The market developments also show that the crowd mentality seems to have prevailed and it has been eliminated when the managers intervened. That also reminds those who are interested in "playing gold" to be careful. If you do the math, you can see that "surfing" or speculating on gold in the past few days has brought little profit but high risk.

The price of precious metals is still forecast to increase, but analysts advise gold players to be “cautious” and keep a “cool head”. These forecasts should only be used as a reference, and those who risked buying gold at the end of 2012 when the precious metal approached VND50 million/tael will “learn” this lesson.

Because at that time, the speculation that gold would increase to 5,000 USD/ounce "inflated" the domestic gold price to nearly 50 million VND/tael. The high expectations made many people buy gold at an all-time high. Since then, the price of this precious metal has slid below the threshold of 40 million VND/tael, and the world gold price has never "touched" the mark of 2,000 USD/ounce.

According to Bidding Newspaper