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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Still Glitters!

Commodities / Gold and Silver 2010 May 01, 2010 - 02:50 AM GMT

By: Sy_Harding

Commodities Best Financial Markets Analysis ArticleGold bullion is at a new high for the year, and has rallied more than 10% since February. Yet it has not attracted the excitement among investors and the media that its rallies usually generate. That may be an indication it has further to go on the upside, since excessive excitement about a gold rally is usually seen before its rallies end.

Gold certainly seems to have a lot going for it right now.

For instance, it has a history of attracting buyers in times of uncertainties in currency and credit markets, acting as a so-called safe haven.

The growing worries about the debt crisis in Greece, which saw its credit rating downgraded to junk status last week, certainly qualifies as uncertainty. And while that uncertainty will ebb and flow as efforts are made to rescue Greece, it will not go away permanently anytime soon. It has been feared for many months that Greece was only the canary in the coal mine of global government deficits and dangerous debt levels, that its crisis is only the first in what will be a long line, eventually possibly even winding up in Japan and the U.S. The popular term has become ‘contagion’. This week’s additional downgrades of the credit ratings of Portugal and Spain, and rumors that Ireland might be next, certainly add to the likelihood of ongoing uncertainty. That may explain why gold gained an additional $22 an ounce, or almost 2%, this week.

Gold also has a couple of other potential positives going for it.

Gold is the age-old hedge against rising inflation, the price of gold rising when inflation rises. Anyone who can remember back to the double-digit inflation of the 1970’s may also remember that is when gold soared to its exciting high of $850 an ounce, reached in 1980 (which at the time was by far a record high). It created so much excitement for gold that not only were people clamoring to come up with more money to pour into gold investments, but housewives were melting down jewelry and family heirlooms to recover their gold content.

Currently there are no signs of inflation in the U.S. In spite of housewives’ complaints about rising food prices and auto and truck drivers’ complaints about rising fuel prices, the government reports show inflation remains benign. However, inflation is a concern in a number of other countries, and gold is not a U.S. commodity but a global commodity. So in those countries there could well be rising demand for gold as an inflation hedge.

For instance, in early April, China’s central bank warned that it expects global inflation to become a problem in 2010. It blames the ultra loose monetary policies adopted by global central banks to rescue financial systems, saying, “Once economies turn better that massive liquidity will definitely add to inflationary pressure.”

Numerous countries have already begun to raise interest rates in an effort to ward off threatening inflation pressures. They include Australia (four rate hikes so far), Brazil, China, and India (where inflation has spiked up to 9.9%).

Those rising inflation fears abroad, if not in the U.S., are a potential positive for gold.   

Then there is gold’s history of usually moving opposite to the stock market, not so often in the short-term, but frequently over the long-term.

For instance, going back to the 1970s again, when gold was soaring to $850 an ounce as an inflation hedge, the stock market, which doesn’t like inflation, was in a bear market. However, as inflation began to cool off, and the stock market was about to begin its powerful new 18-year secular bull market of 1982 -2000, gold topped out into what was to be a 17-year bear market in which gold plunged from $850 an ounce to just $250 by 1999.

And then, when the stock market topped out into its severe bear market of 2000-2002, the beginning of the so-called ‘lost decade’ for stocks, gold began what has so far been a 10-year bull market for gold, rising from $250 an ounce in 2001 to more than $1,200 at its new record high last year. Meanwhile, in spite of two cyclical bull markets in the last ten years, the stock market as measured by the S&P 500 is still 22% below its level seen at the market peak in 2000.

But of course for that positive for gold to be a factor, that it tends to move opposite to the stock market in its long-term moves, the stock market would have to go into another correction, extending its secular bear market. While I do have an opinion and expectation regarding that, it’s another subject for another place.

However, for now the uncertainties in global currency and debt markets, and fears of inflation in some parts of the world, seem to be to be enough reasons to remain bullish on gold.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website, and the free daily market blog,

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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