A Fear Hedge

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I have received a number of emails from readers wondering why gold is rallying as inflation has dropped into negative territory. In the past, gold has been mostly associated with being an inflation hedge, but it can be a hedge during times of great turmoil as well, as this article from 24/7 Wall Street examines (hat tip to reader Richard for this link):

There is no real inflation today. Even if the Obama stimulus package ends up reaching $2 Trillion in theoretical printed dollars from what the TARP of 2008 started out with and what the new package will ultimately cost with bank and industry bailouts over the next two years, the CIA world fact book estimates the US 2008 GDP at $14.3 trillion. Smooth out the $2 trillion over 2008 to 2010 and you do have a lot of funny money, but spread over 3 years or more and you don’t have hyper-inflation.

Industry is on its backside. The jewelry business is on its backside. The consumer is so far on its backside that yoga poses are in order. Every industry that uses gold is on its backside. And almost none of the major central banks have gold as the basis of their currencies.

So you have no actual hard demand for the shiny yellow stuff. Not today any how. The demand for gold is for gold coins, a massive flurry of bullion buying by ETFs (and investors), and the institutions and traders buying the hell out of it. The reason is simple… pure fear.

Gold may be a perfect hedge against inflation. But what you are witnessing today is that gold is also a pure hedge against fear.

There is fear of nationalizing some of the major banks. There is a fear that the DJIA could go to 6,000 and the S&P; 500 could go to under 700.00. There is a fear that unemployment will hit double-digit levels. And there is a fear that our massive and nasty recession is going to be the modern day version of the 1930’s. These are currently all real fears, and this has not yet happened. A year ago the DJIA was north of 12,000 and the S&P; 500 was north of 1,300.00. The closing levels yesterday were 7,365.67 on the DJIA and the S&P; 500 closed at 770.05.

[Emphasis added]

All these fears are justified as the world watches with anticipation as to which shoe will drop next.

I must admit that I missed the entry point as gold crossed its long-term trend line to the upside and simply rallied on. We have no gold holdings at this time, but I ‘m looking to make a small commitment in that sector once I see a pullback. My preference is to enter this area via the ETFs GLD or IAU. As of last Thursday, IAU was positioned 13.85% above its long-term trend line.

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Comments 5

  1. Ulli,

    Some time back maybe a year or more Emerging Markets were being recommended by so many analysts and soon after Emerging Market investments got whacked very badly. My concern now is so many analysts are recommending Gold, that to me is scary. Are there any thoughts out there on this?

  2. Speaking of 247Wallst.com I see they posted their choices for the

    Twenty Five Most Valuable Blogs.

    Among the other measures they used:

    Because not all blogs make money, multiples of revenue and operating income were used to assess value.

    If they had used a metric that included the total amount of money that the blog author had saved his readers then I believe “The Wall Street Bully” would have ranked number one.

    G.H.

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