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The “Flight to Safety” Trade Your Broker Won’t Tell You About

Submitted by Phoenix Capital Research on 08/26/2010 14:19 -0400

Quietly and
with little fanfare, Gold has made a MAJOR change in its status. The precious
metal is largely viewed as THE anti-paper money play by investors. Given that
the world’s central banks (with perhaps the exception of China) have maintained
only one response to every issues that arises in the markets (print or spend
money) Gold should be soaring.

Indeed,
EVERY single new bailout or stimulus or monetization should push Gold higher.
In fact, we should be seeing a kind of gradual awakening for investors as they
realize that each one of these bailouts brings us closer to the “end game” in
which throwing money at the world’s financial problems has failed.

This gradual
awakening should be illustrated by the price of Gold rising ever higher and
higher. Instead, we’re getting choppy sideways action and corrections from the
non-fiat currency. Europe announced a $1 trillion bailout in mid-May. And the
US has just announced QE 2.0, or the monetization of another $340 billion in US
Treasuries last week.

All in all,
that’s some $1.34 trillion anti-paper money policy announced. In the context of
this, Gold should be going through the roof. Instead, it’s gone sideways
showing no gains for the time between these two announcements.

What gives?
Isn’t Gold supposed to benefit from increase monetization and paper money being
thrown around like confetti? Well, historically it has. Indeed, for most of its
bull market Gold moved in inverse relationship to the US Dollar.

This all
changed in November 2009. What happened then? The Sovereign Debt Crisis began
in earnest with Dubai asking for a six-month extension on $60 billion worth of
debt.

At this
point, Gold broke away from its traditional relationship to the US Dollar.
Indeed, since then Gold has actually moved in tandem with the US Dollar. The
correlation between the two is not perfect, but generally Gold and the Dollar
have moved together both to the upside as well as the downside.

This indicates
that as of November 2009, Gold officially became a “flight to safety” play on
par with the reserve currency of paper money: the US Dollar. In plain terms,
Gold is no longer a US Dollar hedge, it is a sort of reserve currency of its
own, tracking its paper money counterpart, the US Dollar.

More
evidence of this comes from Gold’s relationship to the Euro. From 2001-late
2009, Gold and the Euro were the primary anti-Dollar plays for the financial
world. This changed when the Sovereign Debt Crisis shifted from Dubai to
Greece, crushing the Euro. Indeed, when you look at the chart below, it is
clear that the end of 2009 represented the end of Gold’s correlation to the
Euro as an anti-Dollar hedge, and the beginning of its status as a standalone
flight to safety play akin to the US Dollar.

In plain
terms, the Sovereign Debt Crisis has been a game-changer for Gold, breaking it
away from its traditional status as an anti-Dollar hedge and making it a kind
of stand-alone secondary reserve currency next to the US Dollar.

Will this
new relationship hold up in a Crash? It is difficult to say. Gold certainly
held its ground well during stocks’ “initial drop” from late-April to early
July. After a brief hit following the “flash crash” in early May, the precious
metal quickly rebounded and held its ground while stocks plunged to new lows. How it plays out during the next collapse remains to be seen, but the recent market action indicates Gold would likely recover faster than many other assets.

Good
Trading!

Graham
Summers

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Fri, 08/27/2010 - 04:23 | 547676 Coldfire

Liquid. Solid. Gold.

Thu, 08/26/2010 - 17:16 | 546749 TGracchus

Brokers make money by trading. Gold is the ultimate buy and hold and store of value. Of course they are not going to recommend it! They can't make money retrading.

My guess is that a very high percentage of retail investors - particulary the ones who invest through mutual funds - are fleeing the stock market and parking their money in bonds because there is nowhere else for them to go. That's definitely the case for me. Look at the percentage of American's "investments" that are held in 401ks. These plans offer only money market, and (risk-graded but within a given risk level, diversified) stock and bond funds. A few 401ks may offer commodity funds. My guess is that if the nation's 401k plans permitted investments in precious metals, you would see a massive move out of the bond markets by "retail investors" into precious metals. The move would probably be sizable enough to cause very real problems with the ponzi dollar scheme, because it would by a truly massive vote of "no confidence" by Americans in their own dollars. Unforutnately, the 401k schemes are not about providing for a "secure retirement" {insert bitter laugh here}, but just one more program to funnel money into the Wall Street casino. I wish I had figured that out about 10 years ago, but there it is. I doubt I am alone in this realization, however.

Thu, 08/26/2010 - 16:07 | 546551 RockyRacoon