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Strategies & Market Trends : Mish's Global Economic Trend Analysis
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To: TobagoJack who wrote (111380)5/9/2010 7:06:27 AM
From: Dan32 Recommendations  Read Replies (4) of 116555
 
Gold is a terrific asset during periods of inflation and currency uncertainty, but otherwise, it can be very risky.

Take a look at the federal funds rate for the period during which the chart you presented shows a very brief spike in the price of gold (Volkers response to high inflation):

1980-03-05 16.17
1980-03-12 16.45
1980-03-19 16.24
1980-03-26 17.78
1980-04-02 19.39
1980-04-09 19.04
1980-04-16 18.35
1980-04-23 17.56
research.stlouisfed.org

It's at 0.25 now. Official inflation rates in that period were in the low to mid-teens. That's when the price of gold spikes.

There are two ways to hold gold; in a fund, or as a physical asset. Either way, there are risks of loss (theft of physical gold or failure of fund) and significant negative interest rates due to holding costs and/or fees.

Presently, interest rates on currency are near-zero, meaning that money market and bond account rates of return aren't much better than those of gold holdings (and have much higher risk of loss to inflation). Gold makes considerable sense, right now, due negative real interest rates on savings coupled with a high risk of accelerating inflation.

But unless we do enter a period of high inflation (the opposite of Mish's expectation), holding gold has significant risks. The moment we go from negative to positive real interest rates in money market funds and bonds, gold will probably drop very far, very fast.

If the economy were to get worse and we moved from inflation to deflation, the price of gold would drop like a rock. Be careful.
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