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Gold The Most Volatile Year: Buy The Dips, Sell The Rips

April, 13 2012

What would have to change to make me turn bearish? I believe the following three actions would need to be taken:

1. Real interest rates would have to increase 2 percent above the CPI in the U.S. and Europe
2. GDP per capita in Chindia would need to fall, negatively affecting the Love Trade
3. Substantial fiscal cuts would need to be made in entitlement programs in the U.S. and Europe

Fed unwinding will definitely deal a deadly blow to gold bulls, so the real question investors should be asking is: are we out of the woods yet?

With the Bernanke Fed guiding markets over the last couple of years, it should come as no surprise that gold prices are very sensitive to monetary policy.  Record low interest rates amid a weak global economy pushed nervous investors out of both risk assets and the safety of Treasuries.  A weak U.S. dollar, along with massive liquidity injections via QE, helped investors look to gold for it has always been: a store of value.

At this stage gold is set to continue being erratic in the immediate-term.   The improving outlook does face substantial threats, though, particularly the European sovereign debt crisis (which promises to flare up again), which could stoke recessionary fears.