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Is The Price Of Gold An Indicator Of Trust?

The price of gold has been acting differently in 2016 than in the last few years. The reaction to news inputs has been either non-reactive or sometimes opposed to the way it was in the past. Some examples of the change are given below.

When a central bank announces stimulus which would lead to economic growth, the price of gold would typically fall since gold is seen as a safe haven. Negative interest rates as well as higher interest rates were seen as negative factors for gold since both would lessen the appeal of a safe haven. The negative rates would ensure that economic growth is more solid and the higher rates would mean the economy is already strong and would dampen economic growth. Recently, negative rates were announced in Japan, mentioned in Canada and the U.S. as a possibility and went further negative in Europe, but the gold price continued rising. The prospect of stimulus is usually a tonic for equity markets. While this has been true to an extent, a tonic for the gold price it is not. The Fed recently discussed raising rates as well. Higher rates usually indicate overheating and would exude a sense of balance in the economy. This would mean that times are good and the safe haven trade would not be necessary.

Warren Buffett announced recently in his company's annual report the current generation of children are the most prosperous of any generation despite the high debt and subpar economic prospects. Gold rose following that announcement in spite of the fact that Warren Buffett is a well-respected investor and has significant sway upon the markets. The typical reaction would be that equities would perform strongly and safe havens would not.

There was some upbeat U.S. manufacturing data which usually points to a stronger economy. This translates into less fear and less need for gold. Gold is rising on days when "good news" is announced as well as on days when the markets tank. The U.S. dollar strength tends to be a negative correlator to the price of gold. Lately, these two entities have been rising together.

Most recently, the U.S. announced better than expected employment numbers. The equity market reaction was typical, but gold rose with it as well. There were economists saying that the numbers were not as strong as the headline numbers suggest, but the reaction in the gold price was very swift to the upside.

There are more blogs citing the lack of trust in economic data and in central bank policies. These blog posts are not new, but the reaction to this information is new. Is the gold price an indicator of a lack of trust - specifically in central bank and monetary policy? If it is, will the gold price indicate the faith that people have via future data releases? What is driving this behaviour in the price of gold? Gold has been cited as honest money since it is the only asset that is not someone else's liability. Gold may be resurrecting to the level of a universal currency that it always was.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.