In the latest manifestation of the world financial crisis, gold is rallying strongly now in all major currencies. Gold detached from the usual commodity drivers gradually over the period August 07 to the present, and closely reacted to any major new developments in the credit crisis.
In any case, gold and the USD have been beneficiaries of flight to safety. That is why gold and the USD are rallying together. Gold now is almost totally dominated by ongoing credit crisis developments, and the massive attempts to bailout the financial system in every country.
A big question will soon be, when gold exceeds record prices in the USD this time, will the flight to safety then move relentlessly to gold then? I think so.
As we know, the trillions $ the US, ECB, BOE, Japan, Russia and China have thrown at either bailouts or stimulus are causing gold now to rise relentlessly in the major currencies. Obviously, at some point, $20 trillion worth of stimulus and financial bailouts by the world central banks since August 07. The US alone has now committed over $10 trillion fighting the world financial chaos.
Ironically, the USD rallies along with gold to date. Massive flight to ‘safety’ is finding its way to the USD and gold both. The Yen is also strengthening a lot too, but much of that is from Yen carry trade deleveraging, where people sell the stocks and financial assets and then buy Yen and pay off their hundreds of $billions worth of Yen they borrowed in the carry trade.
But, gold rallying in the face of a very large rise in the USD for the last few months clearly indicates the strength in gold’s rally so far. We suspect gold will soon hit a new high in 2009, and gold stocks can too hit new highs as well, when people realize gold continues to rally.
Adapted from Chris Laird, Prudent Squirrel.
In simpler terms, risk aversion-> selling of equities -> USD , Corporate Bonds, Treasury bills, Yen, Gold.
Ultimately, will people sell their USD, T- bills, Yen and buy gold.?
Will the American sell their USD and buy gold, knowing their $ is due to collapse.?
Will the T-bills large holders (Chinese and Japanese) sells the bills for gold bullion.?
Will the Japanese sell Yen and buy gold, knowing their currency is due for devaluation to boost export.?
Will the collapse of banks, markets, currencies lead to gold be the ultimate safe haven.?