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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: YanivBA who wrote (53680)7/21/2006 1:07:20 PM
From: mishedlo  Read Replies (1) of 116555
 
Response from Heinz:

this is true, but only in the very short term. this short term reaction has already happened - during the May-June decline in gold, the liquidity created by rising margin buying power due to the previous advance was taken out of the market (the speculator long position fell from gross 610 tons to below 300 tons).
in the medium to long term, gold is the asset that rises when liquidity contracts. this is why there is a long term negative correlation between gold/gold shares and the broader stock market for instance.
to put it more succinctly, gold's REAL PRICE rises during periods of business and liquidity contractions.
note that the liquidity driven gold rally of 2005-6 saw gold's real price actually fall. a good way of observing this phenomenon is the ratio of gold to industrial metals.
the reason why this is so is gold's role as money - or nowadays, the money of last resort . obviously the purchasing power of money tends to rise when liquidity contracts - thus also the strong correlation between gold/gold shares and the yield curve.
the 2005-6 liquidity driven rally was an exception, not the rule. gold merely followed the other metals in a sort of spill-over operation.
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