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Gold, The canary or the elephant?

Commodities / Gold and Silver 2010 Sep 28, 2010 - 02:33 PM GMT

By: Kevin_George


Many have been talking over the last couple weeks about gold being the “canary in the coal mine” for fiat money. It would be wise for those who believe the price can only go north, to turn their focus instead, to the “elephant in the room”.

Have the gold enthusiasts defeated Ben Bernanke? Have they collectively predicted the future path of the current economic turmoil? Have we seen every twist and turn in the crisis and are ready to drift towards a worthless dollar and hyperinflation?

The irony of the situation in gold, is that those who believe in its inexorable rise, believe it will occur from a collapse in the very system that is helping feed the price rise at these levels. The current climate of money printing may support a move to hard assets and inflation hedges but the panic buying we are now seeing, is also being driven by the ever present flows of hot money, from speculators chasing a knockout third quarter. Money which would disappear in the event of further turmoil, such as happened with the collapse of Lehman Brothers.

The danger of the ‘all-in’ hyperinflationary trade, is much like the “peak oil” frenzy which accompanied oil’s rise to $147 in 2008. Investors who are waiting for hyperinflation, are maybe putting the cart before the horse. How many believed oil was driven by speculation? How many believed it would fall to almost $30? The final stage of the oil move was much the same as gold now- moving in tandem with risk and using any piece of negative economic or political news as an excuse to drive price higher. Anyone who studies charts, knows the fierce nature of bear moves. Crude oil erased approximately four years of gains in six months of bear move and erased much stubborn opinion and profit with it.

Any collapse in the current system, which gold enthusiasts claim they “have lost faith in”, has a high possibility of being accompanied by a large bout of debt and risk deleveraging, long before the onset of any serious inflation. The result would likely see a collapse in risk assets such as the one which occurred post-Lehman, due to fear, de-risking and forced unwinds. Who would gold investors listen to then? The canary, or the elephant?

By Kevin George

I am an independent financial analyst and trader.
© 2009 Copyright Kevin George - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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