Gold Glitters

John Browne

The Fed and the ECB recently took drastic measures to prop up the US and Eurozone economies. This resulted in investors unwinding positions in US dollars in favour of euros, and in a rising US stock market.

But the biggest winners thus far are not the euro or the stock markets, but rather gold and gold-related investments. Browne sets out several reasons that explain the current attraction to gold.

There is a perception that central bank activism will spark inflation. The size and scope of the US and EU printing campaigns just announced is creating an increasingly strong conviction that inflation soon will break out.

This has led to concern that the dollar could trend lower. A weaker dollar would help push up the price for all internationally traded commodities, including gold.

There is concern, too, about an escalation in Israeli-Iranian tensions. War risk in the Middle East and the Pacific is rising. Gold has traditionally risen during periods of geopolitical uncertainty.

Central banks that were once huge sellers of gold, such as those of India and Russia, are now accumulating it, together with China. Savvy investors pay close attention to central bank actions.

There are some indicators for a falling gold price: The EU, the US and Japan appear headed for recession, and the Chinese economy is slowing. A worldwide recession could push down asset prices, particularly stocks. As stocks fall, margin calls and other demands for cash result in the liquidation of gold positions. As a commodity, gold may fall in price as recession takes hold.

But most of the trillions of dollars created by the Fed are sitting in bank deposits or in banks’ bond portfolios. They won’t become an inflation factor until the banks start lending on the basis of these vast deposits of funds.

If debt problems re-emerge in Europe, the euro's basic viability may be threatened. Simultaneously, continuous action from the Fed may finally bring the US dollar under heavier scrutiny. Under such conditions gold may be looked upon as a more reliable store of value than discredited and devalued currencies.

source: 321gold