Wednesday, October 7, 2009 0 comments ++[ CLICK TO COMMENT ]++

Got gold?

No, I'm not turning bullish on gold ;)

Story of the week has got to be gold. It is all over the press even though it is only up around 4% this week, which is very tiny for such a volatile asset. It's not clear to me why gold is rallying. Initially it appeared the rally was due to the secret meeting to price oil in currencies other than the US$. The fact that this has been a rumour for years kind of makes me think it is neither a secret nor should the market have been surprised. I respect Robert Fisk, the opinion piece's author—BTW, it was an opinion piece not a news story—because he always speaks his mind and has openly criticized various governments around the world. However, this isn't much of a news to me. For what it's worth, the suggestion of a secret meeting swiftly denied by various-producing countries.

Some speculate the strength in gold is due to the Austrialian interest rate increase. This is a more plausible view. It is possible that a carry-trade in US$ is developing and this essentially means the world will be taking a short position against the US$.

MarketWatch reports that gold has rallied in US$ terms but not so much when it comes to Euros or pounds or Australian dollars. This, the article suggests, means that investors are expecting inflation in USA but not in other countries. This is hard for me to believe, given how USA is the one facing a big slump, and hence see weaker inflation, while the stronger growth countries should see more inflation (the amount of money printing matters too but other countries are printing as much if not more.)

In another story on gold, Market Hulbert points out the interesting fact that gold and bonds are rallying together. This is rare and investors in one asset are going to lose money. If gold was rallying because of inflation concerns in USA, then bonds should be sold off. After all, bonds (unless undervalued) are one of the worst assets in inflation.

Market Hulbert suggests that the bond market is one that is going to be wrong. I think his reasons—stocks have rallied; bond bullishness really high; gold timer sentiment poor—may indeed mean a short-term sell-off in bonds (note that Hulbert thinks like a contrarian so excessive bullishness is actually bad and vice versa.) But I wonder how true any of those reasons are in the medium to long term. For instance, looking further out, stocks probably have a real possibility of declining simply because they have rallied so much and are hitting valuations unjustifiable even by the bulls (such as short-term forward P/E above 17 on the S&P 500.)

Anyway, I don't have any investment suggestion and I hope you didn't waste your time reading this ;) There are many cross-currents and it is really difficult to get a clear macro picture right now. I'm just throwing out an observation that may turn out to be very important. In any case, gold is not highly correlated with inflation so I wouldn't blindly intrepret a gold price increase as signalling inflation.

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