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Robert Wagner
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Professional Credentials: The reports that I write are my personal research and opinions. They are not associated with any firm or organization, and are not intended to be taken as investment recommendations or advice. They combine my passions in economics, finance, writing and education, and... More
  • Cash Is King; Long Bond Reaction Bodes Ill For Gold 0 comments
    Apr 16, 2013 5:56 AM | about stocks: GLD

    I recently wrote an article titled "Stars are Aligning Against Gold; Hope vs Fear," where I outlined a theory that gold wasn't being supported by the fear of inflation, but by fear itself. I made the case that gold was simply acting as a safe haven for investors to run to in times of crisis or panic. When equities would sell off, gold would typically rally, as money would flow from equities into gold or SPDR Gold Trust (NYSEARCA:GLD). Today however that relationship broke down, and gold sold off almost 10% when the S&P 500 was off only 2.3%. At least for today, equities provide a safe haven relative to gold.

    That however wasn't the relationship that should have caught investor's eyes. When gold and equities were selling off, the 10 year treasury rate was basically unchanged. Typically when the markets have a broad based sell off investors run to the safety of treasuries. Today they didn't, they chose cash over the long bond. While this is only one day, and may prove to be meaningless, if this trend continues it will be significant. What is would mean if the trend continues is that investors are not willing to take the risk of going out on the yield curve, implying that they believe that interest rates are headed higher. If that is the case, gold will likely have further to go on the downside.

    If my safe harbor theory is correct, gold investors should not be holding gold in anticipation of inflation, they should be prepared to sell their gold if interest rates start to increase. If bond rates increase, they will provide a better alternative than holding gold.

    In collusion, gold has recently had many supportive trends turn against it, and with today's action likely destroying or severely weakening the impression of invincibility and belief that gold is a safe haven, it is hard to make a case that gold will turn around anytime soon. With the likely ending of the Fed's QE program later this year, investors in gold may want to look elsewhere. One place they shouldn't look is the Bitcoin. While gold was down almost 10% today, the Bitcoin was down over 25% depending of the exchange. The recent actions in both the gold and Bitcoin markets has likely restored investor's confidence in the US Dollar. If cash has now been restored to its thrown, the failed usurpers of gold and Bitcoin are likely to be sentenced to the dungeon basement of investment returns as investors cry "Long live the King!!!" King Dollar that is.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: GLD
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