After the junk from Brett Arends and James Altucher, the WSJ finally has some worthwhile analysis on Gold. However, there are still many holes in this piece.
The author basically concludes that Gold is a currency and not a commodity because it has followed US Dollar movements closely. Yes, we all know that Gold and the greenback usually move in opposite directions. However, while noting Gold as a currency, the author fails to note that it is a worldwide and universal currency.
Righting America’s national balance sheet would explicitly raise the dollar’s value as investors with money abroad move assets into a more-sound American economy. The selling of euro, yen and pounds would push the dollar higher—and gold lower.
First of all, I would argue that at this point, righting the balance sheet isn’t the issue. The issue is that the US and other nations start growing fast so they can grow their way out of their massive debts. The debt burden won’t become smaller if the US has a balanced budget. In fact, we’d see GDP decline and in turn, debt as a percentage of GDP would rise. If a nation has a low overall debt, then austerity can work. However, when your debt becomes to large, growth is the only answer.
Secondly, the selling of foreign currencies isn’t necessarily bearish for Gold, which has risen against all currencies since 2000. There are many extended periods when both the greenback and Gold moved higher….Q2 and Q3 of 2005, 2001, Q4 2008 and Q1 2009 for starters.
Lastly, the author seems confused by Golds relationship with inflation.
Invest in gold, then, according your beliefs about the future of the greenback. Just don’t invest based on the idea that gold is a proxy for inflation. You are likely to be played for a fool.
Actually, Gold moves in accordance not with inflation but with inflation expectations. In the 1980s and 1990s, we had inflation but since it was disinflation, inflation expectations were kept in check.
Finally, we should note that Gold does well in times of credit stress. Deflation or hyperinflation can result from a tight credit environment. This is why Gold performs well in both deflationary and inflationary environments. Going forward, instead of focusing on inflation/deflation, investors should focus on the sovereign debt picture of western governments. If it worsens, then Gold will continue to rise.
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