The status of gold changed yesterday December 16th when the Fed slashed rates to zero or near zero. Gold lost the remaining of its commodity status for a full investment status. Can gold evolve back to its monetary status as well?
With no interest paid on dollar, why would anyone want to hold any? Risks are high, curves remain steeply positive. The upside potential is very small since one would need to invest between 10y and 30y tenor to get a chance to make a meager profit speculating
on a flatter curve. Comparatively, the downside is huge as short rates can only go higher and the cost of long term debt may rise if there is any difficulty selling the gigantic issues the Treasury will need to finance the countless rescue and support plans. One
may rightly note that the dividends of some equities are higher than long Treasury yields. But that's very theoretical as there is so much uncertainty around next year's corporate earnings. In addition, issuer risk remains at historic high. So what else to
do with the money, especially after Madoff has cast a shadow on collective investment schemes?
In an inflation scenario, gold will play its protection role. In a depression scenario it may be seen as a safe haven against the forced Keynesian fiscal policies that deflation would call for. Either way, there is not much that can happen to gold, now that
it has finally decoupled from commodities. Gold managed to gain while oil was plummetting in spite of OPEC's move yesterday and it trades at par with platinum for the first time in 30 years.For US Dollar based investors it is a good protection against an uncertain
future and risks of montary erosion. For others, it is a good protection against the wild swings of the US dollar as the negative correlation is almost total.
While gold has retrieved its investment status, central banks and especially the IMF might have to sell a few tons to fund their programs. How long can this last? Probably not much. Even central banks at some point need to keep their credibility and margin
for manoeuvre intact. If the simultaneous funding of billions of government bonds issued by so many countries at the same time proved difficult -which is obviously quite likely- even central banks would have no other option than to cling to what would be then
considered as a last resort currency. If a confidence crisis hits all countries (and currencies by repercussion) simultaneously, there will be only one safe haven, liquid enough to be considered as cash. The move could be sudden and of extreme amplitude as
it would result from a reaction to external and unpredicted factors. It could even be further exacerbated if physical delivery would become an issue.
Difficult in today's context to find a scenario whereby gold would crash.