SPDR Gold Trust ETF (GLD) has been bearish since its peak in late March. Being in a full bearish run, many analysts have it continuing this way. Gold has been bullishly influenced by government stimulus packages over the last couple years. And we do know the Federal Reserve said no more stimuli. Logic would have us continue to then look at gold with bearish glasses because the bullish catalyst won't be around anymore. But there was a time when there was no stimulus. Gold rose before the stimulus packages. If we look at the global markets today, what else outside of the stimulus packages could make gold rise again?
Right now, gold is no safe haven
Gold supporters always point to gold as a safe haven in times of trouble. It is a place of safety for people to pour money into. But right now, this is not the case. Gold is acting like just another trading entity right now. A "safe haven" does not fall 7% in two weeks. People look to safe havens for stability and security in rocky times. Lately, gold has not been safe and has not been stable. It has paralleled the markets since the end of March.
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Possibly from a long-term perspective, believing it will provide safety again, we see a few major things going on in the world to hedge against. We have the possible collapse of the global banking system, Greece leaving the eurozone causing financial chaos there, and even JPMorgan's (JPM) $2-billion-plus blunder added some uncertainty to world markets. What could we consider that might cause gold to turn bullish again and provide stability while markets rock?
It is not going to be inflation - at least not right now
If inflation is rising, and goods and services are going to cost more, this would put a huge damper on the economy and also upon the U.S. debt. But inflation isn't rising. I have read on some gold news sites claims that inflation is rising at 5% for goods and 5% to 10% for services, but this is not the case. The State Street PriceStats Inflation Index has the inflation rate as of May 15th, 2012 as 0.065%. In fact, it has not been above 1.008% since July of 2008!
It will be the revelation of U.S. sovereign debt
In 2011, the Federal Reserve purchased 61% of the total treasury debt issuance. So our government is subsidizing its own spending and borrowing by expanding its balance sheet and making it look like everyone wants to purchase a piece of U.S. debt. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. In fact, interest in U.S. debt is lessening. According to a recent article in the Wall Street Journal, interest is waning. The opinion columnist writes:
"…in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector-namely banks, mutual funds, corporations and individuals-have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009."
What is going to happen to the rates if the Feds stop cloaking the real debt picture? That's when inflation will hit hard. It is a smoke-and-mirror play in an election year.
If there are no buyers for our debt, either the Chinese and foreign buyers who are manipulating currency and the Fed stop, rates have to increase. It is that simple. The Fed can't allow that interest rate to rise with the debt outstanding.
Trying to figure out when the SPDR Gold Shares GLD is going to rise and gold becomes a safe haven again is going to depend upon the Fed's manipulative moves in this election year. Other than global events beyond our ability to control, it does not look like gold is going to be a safe haven investment in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
