Sunset Sketches of a Little Country

Monday, September 20, 2010

Rosenberg on Gold (as a Currency) Breaking Out

David Rosenbergh
Sept 20/2010
https://ems.gluskinsheff.net/Articles/Breakfast_with_Dave_092010.pdf
GOLD BREAKS OUT ... AGAIN
What is amazing is that there are just about as many naysayers about gold out there as there are bond bears. Until the investment elite catches on, the odds of these two asset classes continuing as relative outperformers are quite high because no bull market ends until the masses fall in love with the asset or security in question.

What makes the gold story so interesting is that bullion has so many different correlations — with inflation, with the dollar, with interest rates, with political uncertainty — and it also has different faces. This year, for example, gold has shifted from being a commodity towards being a currency — the classic role as a monetary metal that is no government’s liability. This year, there are three events have catapulted gold into currency status, and they all involve attempts by governments around the globe to devalue their own currencies or at least jeopardize the sanctity of the central bank balance sheet:

-The ECB’s decision to allow non-investment grade bonds as collateral on its balance sheet.
-The Fed’s decision not to allow, as was planned, an unwinding of its pregnant balance sheet with obvious implications for the growth rate in the monetary base.
-The decision by the Japanese government to unilaterally intervene in the foreign exchange to reverse the yen’s strength.


Nobody wants a strong currency, and nobody, outside of a few small countries, wants higher interest rates, and now, we have rising U.S.-Chinese trade tensions. Greek bond yields remain at punitive levels and are currently pricing some probability of default. In addition, Ireland seems to be experiencing intense financial difficulties that have compelled the ECB to step in for support. The Mideast peace talks don’t seem to be going anywhere. The U.S. political backdrop is one of intense uncertainty and the most likely scenario post-November 2nd is one of gridlock.

How can gold not thrive in this environment?
The other day, we were asked what would turn us bullish? The assumption of course is that we aren’t bullish on anything. Well, go back and look at my track record and you will find that we have been gold bulls now with near consistency for the better part of the past decade.

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