It seems contrary to simple logic that investors who are strongly risk-off tend to shun gold. But in the markets, old ways die hard. Posted by James Randolph on July 26, 2011
Why the gold market suffers when investors are averse to risk.
July 26, 2011 – It seems contrary to simple logic that investors who are strongly risk-off tend to shun gold. But in the markets, old ways die hard.
Cash remains the asset of choice for safe haven and even as a store of wealth. There was good enough reason for that when the major western currencies – and especially the dollar – were more or less stable. But now the steady rise in the price of gold against the dollar, euro, and pound sterling sends an unambiguous signal that cash is far from safe.
The absolute best we can hope for is that those currencies don’t become totally worthless. At the very least we should look for a better currency. But what would it be?
The Swiss franc comes to mind, because it has been moving in very close correlation to gold. But that is the precise reason it must be excluded: the franc is solid only because its supply is limited and balanced by Switzerland’s gold reserves. China cannot take over yet because its currency is only now being introduced into the foreign exchange. And almost everything else is tied to the dollar
The global economy is anxious to resolve the problem. The overwhelming abundance of dollars throughout the world means a sudden collapse of the currency would deal a death blow to the global economy. But by the same token, the world does not have the means to bail us out. The only answer, it appears, is to reconnect the monetary system to gold.
Central banks are already bracing for the crisis by stockpiling gold. They aren’t hoarding cash, and they are shedding themselves of sovereign debt as rapidly as prudence permits. Yet despite it all, cash continues to come out on top.
Let’s put that in perspective. For centuries the value of gold has proven to be remarkably consistent. The dollar has been dominant in global finances for perhaps 50 years. Which track record merits more consideration as a safe haven – gold or the greenback?
Personally, I hope the market never figures it out. Like never before these times are risk-off and the biggest risk is to cash. For as long as people keep swarming to cash, I will be happy to capitalize on the gold market.
Senior Staff Writer – Certified Gold Exchange