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The "Flight to Safety" Trade Your Broker Won't Tell You About

By Graham Summers      Printer Friendly Version Bookmark and Share
Aug 17 2010 11:54AM

Quietly and with little fanfare, Gold has made a MAJOR change in its status. The precious metal is largely viewed as THE anti-paper money play by investors. Given that the world’s central banks (with perhaps the exception of China) have maintained only one response to every issues that arises in the markets (print or spend money) Gold should be soaring.

Indeed, EVERY single new bailout or stimulus or monetization should push Gold higher. In fact, we should be seeing a kind of gradual awakening for investors as they realize that each one of these bailouts brings us closer to the “end game? in which throwing money at the world’s financial problems has failed.

This gradual awakening should be illustrated by the price of Gold rising ever higher and higher. Instead, we’re getting choppy sideways action and corrections from the non-fiat currency. Europe announced a $1 trillion bailout in mid-May. And the US has just announced QE 2.0, or the monetization of another $340 billion in US Treasuries last week.

All in all, that’s some $1.34 trillion anti-paper money policy announced. In the context of this, Gold should be going through the roof. Instead, it’s gone sideways showing no gains for the time between these two announcements.

What gives? Isn’t Gold supposed to benefit from increase monetization and paper money being thrown around like confetti? Well, historically it has. Indeed, for most of its bull market Gold moved in inverse relationship to the US Dollar.

This all changed in November 2009. What happened then? The Sovereign Debt Crisis began in earnest with Dubai asking for a six-month extension on $60 billion worth of debt.

At this point, Gold broke away from its traditional relationship to the US Dollar. Indeed, since then Gold has actually moved in tandem with the US Dollar. The correlation between the two is not perfect, but generally Gold and the Dollar have moved together both to the upside as well as the downside.

This indicates that as of November 2009, Gold officially became a “flight to safety? play on par with the reserve currency of paper money: the US Dollar. In plain terms, Gold is no longer a US Dollar hedge, it is a sort of reserve currency of its own, tracking its paper money counterpart, the US Dollar.

More evidence of this comes from Gold’s relationship to the Euro. From 2001-late 2009, Gold and the Euro were the primary anti-Dollar plays for the financial world. This changed when the Sovereign Debt Crisis shifted from Dubai to Greece, crushing the Euro. Indeed, when you look at the chart below, it is clear that the end of 2009 represented the end of Gold’s correlation to the Euro as an anti-Dollar hedge, and the beginning of its status as a standalone flight to safety play akin to the US Dollar.

In plain terms, the Sovereign Debt Crisis has been a game-changer for Gold, breaking it away from its traditional status as an anti-Dollar hedge and making it a kind of stand-alone secondary reserve currency next to the US Dollar.

Will this new relationship hold up in a Crash? It is difficult to say. Gold certainly held its ground well during stocks’ “initial drop? from late-April to early July. After a brief hit following the “flash crash? in early May, the precious metal quickly rebounded and held its ground while stocks plunged to new lows.

Pay close to attention to how Gold reacts during the “next leg down? in stocks. If it bounces back quickly again after a brief dip then it is officially a stand-alone “flight to safety? play. And I bet it’s one your broker won’t tell you about.

Good Investing!

Graham Summers



I call it The Financial Crisis “Round Two? Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance? paid out triple digit gains in the Autumn of 2008).