Few thoughts on gold

via WSJ,

Gold futures were mostly steady, hanging onto the prior session's
gains amid concerns about European debt issues after reports that the
head of the International Monetary Fund and Spain's prime minister will
meet on Friday. This triggered initial worries that the country
may seek financial assistance, although Spanish officials said they will
not be seeking aid.

"Apprehensions that the [European Union] debt issues could translate into difficulties
for the U.S. economic recovery are still preoccupying the trade," he
said. The euro weakened as traders fled Spanish bonds on worries
the country may seek financial assistance, with the gap in yields
between 10-year Spanish and German bonds widening. The single European
currency fell to $1.2294 from $1.2348 late Tuesday in New York.

Investors, particularly those in Europe, have often bought gold on a flight to
safety in recent weeks whenever the Continent's debt problems appear to
worsen, thereby pressuring the euro. On Tuesday, gold rose even though
the euro and equities were higher. Normally, this might erode the
safe-haven buying of gold, but analysts described a mood in which some
investors used a recent price retreat as an opportunity to buy the metal
on ideas that euro-zone sovereign-debt issues would return to the
forefront.


1. Sovereign debt trouble encourages buying gold.
2. Fear for economic instability pushes investors to seek an psychological safe haven
2. People may also be buying gold to hedge against inflation.
3. Stronger gold and weaker currency the two sides of the same coin? Probable that investors are buying gold and shorting euro at the same time?

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Conclusions:
1. Gold prices should continue to be strong, because
2. Investors do have things to worry: the European trouble, the consequences of loose fiscal policy and low interest rate, oil spill, regulation, blablabla.
3. Under the export-led recovery plans, developed countries intend to see their currencies drop lower. So investing in euro or dollar denominated assets might not be a great idea because of the additional market risks. Plus,
4. Investors have reasons to avoid long term bonds for now, since
5. Bond yields are not impressive enough to mitigate the fear investors have, and
6. The bond market is anticipated to experience a turmoil, once interest rates are raised.

Generally, rising prices of gold indicate conservative, or to some extent bearish, sentiments. If you believe that there's nothing else rewarding enough to justify the financial risks and psychological burden, why not just invest in gold? Lately, with a stock market in correction mode, a bond market full of future surprises, an worldwide recovery just underway, this is exactly what many investors are thinking.


Yi Gao
Summer Analyst
Analyze Capital LLC