Why Gold Is Rising Now

We have spoken about volatility for the last few weeks. Indeed, there is plenty of volatility and not of the type brought on by world events, or economic events, nor even tectonic shifts – as in a major innovation or reaction to one.

The volatility is being created in the financial sectors of many countries and/or regions.

The Swiss devaluation of their franc was a symptom of the volatility we’re speaking of. Europe has been in a slow-to-no-growth mode for some time. The actions they should have taken in the late 2000s in concert with the U.S. and China (to a lesser degree), was a terrible missed opportunity. Now, they have to add liquidity (as an umbrella concept) to their collective economy, the world’s largest when lumped together.

But now, the movement is creating a double envelopment and creating the volatility so evident in markets.

The first side of the reaction, larger and easier to explain, says that money will be cheaper. Let’s remind ourselves that this phenomenon will affect the whole world. And, although gold is dollar denominated in trading, Europeans and those involved with the euro will seek investments that give returns. Think back to when the U.S. began quantitative easing and think what happened once tapering took grip of the markets.

The second side of the reaction to European intervention says that it is too little, too late.

While it’s counterintuitive, both sides of the reaction are creating a similar pull on gold at the moment. (There is a third impulse loose in the world economy that will soon be extinguished: is it or is it not going to happen? We will know after the European Central Bank’s meeting this week.)

Another strain running through volatility’s revival is the Chinese economy. We can’t imagine a more varied and unpredictable set of data emerging. Housing is crashing and so are banks that hold that paper. Imports are improving even though more goods are being produced at lower prices. Some measures – the IMF’s – says China is near to contraction.

Finally, the never-ending spiral of oil is adding to equities’ volatility. Is the price drop good, bad or indifferent news? No one seems to be able to decide, so we see stock markets, especially the Dow, strongly buffeted by each new fresh round of crude decline.

This is anecdotal evidence, but a friend of ours in south Texas saw gasoline on sale at a large chain’s pumps for $1.58 per gallon. That will cut into a lot of companies’ bottom line but helps the American consumer immeasurably.

Wishing you as always, good trading,