Just over a month ago, the mainstream financial media seemed set to declare gold dead.
There was talk that gold was no longer a safe haven because it had not reacted as some had expected to the ongoing crisis in Europe. This assumption came from a total misreading of the situation to begin with, and now gold is back in the limelight.
In the earlier days of the crisis in Europe, gold was serving just one of the vital functions that it has traditionally provided to investors: that of a ready source of liquidity. As losses mounted up for traders and investors in other markets and other asset classes, many turned to gold to raise the case needed to cover their positions. This is very similar to what happened in 2008 when the US financial system almost went into complete meltdown. Initially, gold declined in price as investors needed to raise cash. But gold recovered and the smart money flocked to it as a safe haven. Gold was one of the few investment categories that ended 2008 higher than it began 2008–and substantially so.
We are now seeing a replay of that same scenario with regard to Europe.
After declining during much of the first half of 2012, gold has rallied. Demand for the yellow metal as a safe haven has returned–as it always inevitably does.
Gold has now risen for 8 consecutive trading days and there are two distinct reasons for this:
1. Globally, investors are finding their way back to gold because they are losing confidence in financial assets and banks.
2. A new round of disappointing economic news has struck the USA, prompting investors to assume that the US Federal Reserve will take some action designed to boost economic activity–especially with an election coming up. The problem, of course, is that the actions taken by the Fed are unproven to stimulate economic activity, but they ARE proven to undermine the value of the US dollar, which is a virtual guarantee to be bullish for gold.
Therefore, not only are we witnessing a gold rally currently, but it now looks as if Federal Reserve policy will get back on a track to undermine the US dollar, just as it has for several years now. The strength in the dollar in the first half of 2012 will prove temporary, just as the weakness in gold proved temporary.
Now is an ideal time to accumulate a diversified portfolio of gold investments–ahead of the renewed decline in the US dollar and before the European crisis spreads, both pushing gold prices substantially higher.