The key point to understand about gold is that it is neither a risk nor a safe haven asset because it doesn’t move with or against risk appetite. Instead, it rises with fear about the value of paper currency, regardless of overall risk appetite – and that fear can occur in both bull and bear markets. Here’s the proof. Words: 481
Lorimer Wilson, editor of www.munKNEE.com, provides below further reformatted and edited excerpts from Cliff Wachtel’s (www.avafx.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. Wachtel goes on to say:
Throughout the entire risk asset rally of March – December 2009, gold rose right along with the S&P 500. Why? Because of fear of inflation. The US dollar was selling off on fears of impending hyperinflation from the Fed’s massive stimulus program. The global economy was widely believed to be recovering, and it was feared that this growth would soon unleash inflation from the supposed large increase in the money supply – albeit an oversimplification because this reasoning fails to consider whether the money was actually circulating in the economy.
During the period from mid-April to mid-May 2010 the S&P 500, our risk appetite barometer, fell hard as the EU debt crisis metastasized into the global market-crasher it remains yet gold rose sharply during the same period, just like a safe-haven asset such as the USD. Why? Because of fear that the euro would lose value, either via disintegration of the EU or devaluation via money printing needed to bail out Greece and other troubled nations (or more correctly, the big European banks holding their bonds).
Gold rises when:
markets think paper currency is more likely to lose value, be it due to:
a) inflation from growth during good times when too much money chases too few goods, or
b) financial system or currency collapse
Gold prices drop when:
a) there is no concern about the loss of value of paper currency
b) its value is rising in deflationary periods regardless of whether overall risk asset markets are rising or falling.
Why is this especially important to know [right] now? Because for the coming months, deflation is the bigger concern than inflation as China and the EU both experience slowing growth, and the inflation figures remain tame in both the US and Japan – [and that means we are likely to see a DROP in gold prices.]
*http://seekingalpha.com/article/206487-the-must-know-truth-about-gold?source=article_sb_popular (www.avafx is a leading online trading site for global currency,commodity, and stock index trading.)
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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