Isn’t that strange?

I say that because it’s funny how when trends become interrupted, investors tend to change their perspectives to fit in with the new prevailing wind. More often than not these are mere interruptions to a long term secular trend that investors are insufficiently informed about to understand.

The current classic example is the attitude towards gold. It seems to me that during the course of the last week the entire world has spun 180 degrees. Gold is no longer the ultra-favorite asset class of choice.

Until one week ago, investors had found room for gold within their portfolios as a separate asset class. In the relatively safe knowledge that the dollar is falling and in the certain knowledge that government deficits are rising and stand an odds-on chance of creating significant inflationary tailwinds at some imprecise point in the future, gold rose and is set to put in a ninth consecutive annual price rise.

I wonder how many asset classes can claim that not insignificant feat. The S&P 500 index only recently broke even from a decade long perspective.

Yet I happened to hear one perspective on CNBC this afternoon, which made a lot of sense, although in my opinion it’s way too early to write off an equally compelling argument for gold. This analyst noted that when growth and therefore interest rate rises were back on the Fed’s Washington table, the writing would be on the wall for gold. Watch out for prices back below $1,000 per ounce.

It’s true that under typical circumstances that savvy investors would quit the safety of gold when the scare is gone. But the “scare” in these circumstances is hardly likely to shift in the medium-term. In other words, the scars left over from the economic battle this time around are unlikely to heal in the same way as post Nasdaq-bubble or even after the Savings & Loan crisis of the early ‘90s.

The over-reliance on credit within the U.S. economy – a move that has been adopted the capitalist world over – a reliance that has been ratified by Greenspan’s Fed as it eased monetary policy each and every time the going got tough, has an uncertain future.

No matter how much we believe our homes are worth and no matter how optimistic we care to be about a housing market recovery – to put it crudely, we all hope that prices recover and then resume a rise based not on the supply and demand for homes, but the supply and demand for credit. It appears that it will be difficult going forward for lenders to both want and be able to lend the value of loans they became accustomed to lending in the days of assured home price gains.

In short, what is likely to be a temporary rally in the value of the dollar has upset the theory underpinning a very sound rally in the price of gold. There is no bubble in the price of gold. Its price may have come too far too soon, but it’s way, way below the inflation-adjusted 1981 peak at $2,600 per ounce.

The Supreme Council of the Secret Order of Jurojin

 Tyche Research

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