As Gold Passes $1,265, Where Is The Top? The $140 Crude Lesson

It is easy to forget that, unlike money, there is a limited supply of gold. Government printing presses have been hard at work since the beginning of the recession. The mining of gold may have picked up a bit, but not enough to offset the metal’s run from $900 a year ago to $1,265, a 40% increase.

The notion that gold has increased  more than other investments is flawed.The NASDAQ is up more than 30% during the last year, and until very recently that number was well above 40%. A recovering economy and the belief that corporate earnings would rise pushed the index higher at a remarkably rapid rate. Now that there is a concern about the recovery, the index has sold off a bit.

Gold is not so attractive that it has kept the IMF,  India, Mauritius and Sri Lanka from selling nearly 200 metric tons of the precious metal since the beginning of the year. Saudi Arabia holds almost twice as much gold as was previously thought. The actions are not unlike what oil traders did when they dumped futures when crude hit $140 in mid-2008. For each sale, there was, of course, a buyer. In late 2008, it was the buyers  that got burned.

Gold may be viewed as a safe haven investment, but that is only true so long as capital flees Europe and risky corporate debt in companies that have issued high-yield securities. Oddly enough, corporates default rates have fallen to 1% this year, according to Fitch.

The rise in gold is due to fear. The euro and EU debt may not be good places to put money that is risk averse, but the rapid deterioration of the stock market, US debt, and corporate papers is overblown. These assets are probably  safe, sound, and very likely to appreciate unless a double dip recession occurs. At this point, that seems unlikely.

Douglas A. McIntyre