Monday, December 12, 2011

European Expectations and the Price of Gold

You never want to read too much into any short-term trend, but take a look today's market performance, as well as the "correction" we've seen across asset classes since spring / summer peaks and notice which assets have done well (high quality income producing bonds) and which have done poorly (equities, non-US currencies, commodities, AND gold). I highlight gold because over the past three years risk-asset sell-offs have broadly been met by strong bids for Treasuries and gold, but today's performance and the drawdowns indicate it may be losing that flight to quality bid.

Daily Performance (December 12th, 2011)

Drawdown from 52 Week High

As Eddy Elfenbein's gold model outlined (further optimized by Willem Weytjens), gold has broadly done well in low (or negative) real interest rate environments. In fact, should inflation run at its historical levels the next two years, Willem's revised model calls for $4000+ per ounce gold in the next few years.

Yet, gold is down about 12% from its recent peak. One possible reason is the concern over Europe. My own thinking... how unlikely is it that things get worse, impacting global aggregate demand and the financial system more broadly? In that case, how improbable is disinflation or deflation, which in turn would mean these low nominal rates may actually move a lot higher in real terms.

Source: Yahoo