Gold fell 2.2% yesterday (silver -3.1%) as increasing risk appetite saw stock markets in the US surge. A rally in stock markets was overdue but the sustainability of this latest rally is doubtful and equity markets in Asia were mixed and after a lower start, are tentatively higher in Europe. The financial and economic fundamentals remain very poor and deteriorating and unfortunately this is likely yet another dead cat bounce in equity markets.
Superficially the news, in the form of a memo from the CEO to staff, from Citigroup was a brief ray of light amidst the gloom, but Citigroup remains close to insolvency and remains on the ropes and this is likely to be a short lived reprieve. It is worth remembering that there were similar claims of financial good health by the CEO’s of Bear Stearns and Lehman Brothers days before their demise.
Gold remains higher in dollars and other currencies year to date but may see further weakness in the short term. Nevertheless, macroeconomic and systemic risk and the real and growing medium term threat posed by inflation means gold’s long term fundamentals remain sound.
Zero percent interest rate policies (Zirp), real negative interest rates, printing money and monetising debt, massive bailouts and stimulus packages, huge government deficit spending and competitive currency devaluations will be very inflationary and continue to make gold an essential diversification for the risk averse.