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Gold has been under pressure lately. Since the start of September, gold prices have been drilled around 5% lower -- not exactly the sort of price action you'd expect from an asset that's traditionally thought to trade opposite stocks. But, frankly, most investors take the wrong view of gold; with no intrinsic value, flow of funds is a crucial component in determining gold's worth as an investment.
Keep in mind that there's a big difference between saying that gold has no intrinsic value and saying that it has no value. Gold certainly has value (it's valued just shy of $1,800 per ounce at last count), but it's best to think of the metal as a currency rather than a commodity. People buy gold because it's a proxy for money -- one that isn't impacted by the factors that cause the ebb and flow of the dollar or euro. But if that's true, why did gold slump in the last few months?
>>Is Gold Poised for the Next Leg Up?
I've been harping on this for the
last couple of months: The biggest reason is that there haven't been "fundamental" buyers of gold lately. Instead much of gold's 2011 rally has been because it's an anti-stock trade, one of the few options out there for investors who want to escape the volatility in stocks. The biggest indicator of gold's anti-stock status is the fact that gold and treasuries (two ideologically disparate asset classes) have been trading in lockstep with one another.
Fed's Operation Twist announcement artificially boosted demand for treasuries back in September, sapping demand from gold as one anti-stock trade suddenly became marginally more attractive than the other.
Even so, now's a good time to get back into gold through the
SPDR Gold Trust(GLD).
>>6 Gold & Silver Stocks for the Eurozone Debt Crisis
For starters, gold has been showing some
technical signs of strength since the end of October. At the same time, volatility in stocks has been rampant (today's drop in the S&P 500 is a perfect example), and the spread between stocks and treasuries has been closing for the last month.
More significant is the potential impact of inflation. Operation Twist showed that the Fed is running out of options to stimulate the economy; reducing or eliminating the rates being paid on banks' massive excess reserves would effectively force more private lending -- and balloon the money supply at the same time, ratcheting up inflation. That's a perfect scenario for the gold "currency" to rally.