by Market Harmony » Sat Aug 13, 2011 8:20 pm
These wild bungie cord swings in the equity markets make a lot of people nervous and they, in turn, flock to safe haven assets. US Treasury bonds, of all things, and gold have seen large increases of buying from across the globe. This isn't just a US Dollar to Gold ratio type thing, this is a world fiat currency vs all other assets scenario. The world money supply will need to explode in order to fund the bailouts needed in the PIIGS. Smart money knows this and will attempt to find any other means to protect their wealth. This is where bonds and gold have come into play recently. In my opinion, those in the bond market will eventually repent their decision.
Gold's safe haven status is not just US-centric, it is a much larger global phenomenon. Central banks, institutions, and individuals flock to safer assets when a currency is devalued. The global issue at hand is that the world reserve currency, the US Dollar, backed by the faith on our ability to pay our debts, was DOWNGRADED. The entire system, predicated on AAA status of the USD, has just had their currency devalued. Now, re-read the second sentence in this paragraph.
Immediate reaction to the downgrade was to sell US equities and rush to gold and bonds. But this will settle as the value of these various assets find their respective levels against the other assets. Does an ounce of gold become better than X number barrels of oil, or a tailored suit, or so many shares of Apple stock? This rebalancing of assets has not yet fully occurred. There will be fluctuations, they will be wild and mild, there will be misdirection, there will be finger pointing. The important aspect is that you keep a clear head and continue to ask yourself, "What is the best asset out there?"
Gold will find its new level soon enough.
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