Gold In Full Blown QE Mode

Gold is a weird cat with multiple personalities and more than nine lives.  The yellow metal is up almost $100 since last Friday’s weak U.S. employment report.

At any given time period  gold will assume any one of its multiple personalities based on a fundamental story and trade as:  1) a safe haven;  2) an inflation hedge;  3)  a commodity; 4)  a store of value against central bank balance sheet expansion;  5)  an alternative currency;  6)  central bank reserve currency;  7)  a diversification asset;  8)  an Armageddon hedge;  and/or 9) all of the above.

The key for traders is to determine which dominant face it has put on and ride it until perceptions of the fundamental story has changed and then turn it around.

We believe the correction from its Sept 2011 high was based on what is happening in emerging markets.   First,  and probably most important, China’s current account is shrinking and we hear anecdotal reports  capital is moving out of the country thus slowing growth or actually reducing its international reserves. Brazil and other emerging markets have also recently experienced some capital flight.

This has on the margin slowed the growth or reduced the global monetary base.   Without a major balance sheet expansion from the Fed or credit expansion in the banking sector where the monetary base expands into money to create inflation,  gold has been selling off.  Gold, in our opinion, almost always trades on the first derivative of perceptions.  That is, not on levels of, say, the monetary base, but on changing perceptions of the change in levels.

Take a look at how gold reacted to the weak U.S. employment report on Friday. It popped big time and hasn’t looked back.  It has fully put on its QE personality and will be looking for red meat from the Fed.

We think the Fed Heads will deliver.  If not,  expect a decent sell off.

The question is will it be enough to thrust gold to new highs? LTRO2 couldn’t.

Stay tuned.

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