Over the past 2 weeks, gold has seen its biggest two day drop since February of 2010. What bull market goes up in a straight line?
But, what triggered this drop?
It’s simple. If investors believe their future with gold is good, then they will buy gold. If investors believe their future with gold is full of warnings than they will not run to the precious metal.
What are examples of “warnings? We see plenty of those and we have plenty of worries to keep even the most experienced investor awake at night. Some examples are: quantitative easing, sovereign debt, currency wars, EURO ZONE problems, and a housing market where 1:7 mortgages are in foreclosure; also inflation, deflation, hyperinflation, etc.
Has the ECB done enough to fix its ongoing debt crisis? Is the US Economy truly on the mend? We are seeing a very weak stance coming out of the ECB to strengthen the recovery fund and the US housing market is still in the critical zone. Further, we have a chance of soaring inflation.
Inflation soaring? Really? Consider this for a moment.
Investors of US debt are growing closer to a breaking point that could force a major selloff of Treasuries causing yields to rise sharply. This would make it expensive for the US Government to borrow to spur a sluggish economy.
If that happens, inflation could soar. Investors would then flock back into gold, as a safe haven. We have already received signals from China that it intends to reduce their holdings of US Treasuries. If you think that will cause a mild inflation risk, you are in for a rude awakening.
When inflation is growing in the double digits (hyperinflation), it has a single cause. It occurs when a government cannot borrow money because its debt has risen so much that investors believe they will never be paid back close to what they spent.
Is the run towards gold over? I think not. With volatile currency markets, US debt worries, etc, etc, investors still need a safe have.