What a week - gold looks strong

This week saw another bout of risk aversion sending currencies crashing against the Yen and dollar. Equities got a good jolt as well, bringing the Volatility Index out of its slumber. By mid-week, it was looking like things could really head south.

Gold got whacked down to below $1090, taking out all the stops below $1100. But on Thursday, there were some signs of unusual strength. Well, unusual lately at any rate. Gold stood strong against a rising dollar, and even rose with the dollar for brief periods, while equities were swooning. This is starting to look like gold pre-Oct 08, when it used to be a safe haven against crashing markets. Of course, back then the dollar was generally weak, but there have been some extended periods in recent years when gold and the dollar rose together.

So now, if we see gold rising when the dollar is rising due to flight to safety, that is a sign that gold is re-gaining its former status as a safe haven, as opposed to behaving like a risk asset being fueled by the reflation trade. Sure, if the dollar keeps heading north in a big way, gold will suffer, but it may suffer less than in the recent past. Let’s keep in mind that what gold has demonstrated since 2002 is how it gains relative to all currencies. Yes, when the Euro is weak gold is strong in Euros while being weak in dollars. But over the past 8 years, gold has been relatively less weak than all currencies, as you can see in charts of gold in all currencies. In fact, gold has been amazingly strong in all currencies since 2002.

Think of it like this: currencies are gradually losing value due to unrestricted money printing. So gold may be weak in a given currency for some period of time, but it loses less against that currency than other currencies lose against that currency. Conversely, gold gains more than each currency loses over time. Its relative strength has been profound.

Now, what about that projection of $1350 in April? My gut says the chances are now better than 50-50. Maybe 60-40. Of course, we may only get to $1190 before markets crash and the dollar carry trade gets unwound in a panic. We almost got there this week with the Yen. The Euro-Yen pair dropped to just below 120, which is a critical level. Below 120 there is significant risk of Yen carry trades being unwound in a panic, which would look a lot like Oct 08.

My guess at the moment is that we may have flirted with disaster and the markets will try to put that behind them for a few weeks. It is now undeniable that equities and the Euro and pound are critically wounded. But we might get a bounce, and it could be a strong bounce. For gold to hit $1350, there would have to be some change in character like we saw yesterday, back to its safe haven roots. The Yen will be strong, and the dollar may be less strong but still strong, and equities are teetering on the brink. But either there is a huge return to the reflation trade, or things get dicey again soon and people flee to gold, like the old days. Both of those scenarios make the $1350 projection plausible.

Or, the hot money flees from everything as everything crashes, and gold suffers but not as much. That is also possible, if not likely. But that may happen a bit later this year. The next month to six weeks will be interesting. Stay tuned - to the market.

This entry was posted on 26/02/2010 at 04:37 pm and is filed under Gold. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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