Global Upheavals Favor Gold 

02/22/2010 12:01 am EST


David Coffin

Editor, Hard Rock Analyst

Market uncertainty tied to China's rapid rise and European crises should benefit the precious metal, write David and Eric Coffin of the Hard Rock Analyst.

The January market dip was focused on profit taking. Good results in various sectors brought selling, but not sell-offs. It is evidence that caution still reigns at the start of the new decade and isn’t really saying much else, for now. It does indicate wealth preservation after the 2008 Crunch is, and likely will continue to be, the focus of Boomers who are nearing the end of their working lives. How long they are good with clipping low-interest coupons is the next question on the table.

How the next while plays out is still subject to diverse opinion, as it should be during such a major shift in global economic weightings. The US dollar is still being viewed as a safe haven by some, even while others focus more on the need for the greenback to soften longer term so the US can generate a positive trade flow. Every bit of good economic [data] has bond traders weighing whether it results from commerce or stimulus at work, and pondering whether the appetite for low-interest Treasury bills can continue. 

Conspiracy theories abound about “someone” holding the equity markets up. We find this ironic; the US Treasury is quite happy to see equity markets pull back and drive buyers into the Treasury market.

Debt troubles in Europe continue to generate currency swings and talk of (of course) a gold bubble. Default in Euroland would lift the US dollar, but bears should remember gold is a popular reserve asset lately, too. The end game could be better for bullion than most expect, even in a default scenario.

We doubt a comfortable trend line will be obvious for a while yet. The one assumption gaining currency is that China’s growth is central to sorting out the way ahead, and that some concern about its rapid rise in bank borrowing is warranted. Even while reminding again that this borrowing is from domestic savings, we have to agree. So apparently do Chinese officials.

A recent musing we heard spoke about a “hard landing” in China, but even this bearish stance meant a growth rate of only 6%. Not a reason to drop the wheels, in our book, but still a caution since it speaks to the difficulty of what to focus on during the major shift that is under way. That shift is accelerating, and this means uncertainty that will continue to roil markets. This lack of clarity, as much as anything else, should keep gold on an up trend. We are certainly looking at base metal players, but gold will remain our main focus for the time being.

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