Gold - The Other View

With gold now dislocating from its ordained function as a dollar collapse safe haven, and today being a rare example of when both gold spot and the DXY are up, it would appear there is nothing left that can prevent gold from hitting escape velocity in the immediate future, as more and more investors tell the Fed they can take their secret bail outs of Goldman, also known as "Systemic Risk" threats, and smoke them using worthless, newly printed dollar bills, while everyone will be happy with a few extra ounces of Au, thank you very much. Yet is it time to consider the contrarian play? We present a piece by Capital Economics titled "Gold is expensive insurance against bubbles" with whose assumptions we do not necessarily agree, yet which does at least attempt to provide a counterpoint to what some (but not Ben Bernanke) consider a bubble in the making.

The problem with the report is that it really does not say anything new: the core underlying assumption is the rate of collapse of the dollar will moderate. Yet the key analysis that is sorely missing is the capital markets' perception, and evaluation, of Federal Reserve policies, as well as the continued balooning of the Fed's balance sheet, which last Thursday hit a record level. In full honesty, the CE report does present some opinion on this issue, however their conclusions that "valuations in most markets have simply returned to more normal levels and second, thatcentral banks still have the tools and the opportunity to withdraw the monetary stimulus if required to prevent bubbles from developing" leave much to be desired. Any discussion of the price of gold can not avoid at least a rudimentary perspective on the viability of the Fed's recreation of the Japanese fia(t)sco, as well as the massive amounts of excess liquidity which in our opinion are now hitting the gold market with a greater impact than stocks, as algos realize the marginal buyer in spot gold has much more pricing power than in most other asset classes.

From the report:

Our forecast that gold prices will fall back below $1000/oz by the end of this year and as low as $800/oz in 2010 depends crucially on the assumption that the dollar stages at least a partial recovery. The continued rally in gold is therefore a challenge to this view not just because prices are going up (obviously), but also because this has happened despite the recent stabilisation of the dollar. (See Chart 1.) Against the euro, for example, the US currency has been hovering at or just below $1.50 for a month, and yet the price of gold has risen by another $100/oz or so over this period. Other key asset prices have also been relatively stable in the last few weeks, including oil and equity indices, confirming that gold has developed some independent  momentum.

Full report below for your consideration

h/t Robert

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Global Markets Update - Gold Bubble (Nov 09).pdf	135.01 KB