August 10, 2011 – While uncertainty has dominated the global stock exchanges this week, gold bullion prices are moving with conviction. Some markets – NYMEX in particular – look like they want to reverse the trend in the opening hours, but by the end of the day there has been no holding gold back. 

Skittish investors are concerned that the price is moving too fast, and gold bears have the charts to feed their fears. Clearly, they say, gold is breaking out of the comfort zone of its moving average. What they fail to mention is that for several months running gold has underperformed according to every single fundamental driver. Even at the current trajectory it will take quite a while to get back on track.

That isn’t to say that the argument is devoid of merit, however. The gold bullion market has always been strongly influenced by investor sentiment, and in the recent past we have seen several spikes and dips fueled by brief emotional departures from the general mood. It is not out of the question that the current run is nothing more than a panic reaction to the S&P credit downgrade, but there are compelling reasons to suspect otherwise.

If gold’s run were due to investor panic then we would expect silver to be performing similarly. But silver’s drop last Friday was far more severe than gold’s, and Monday’s gains fell far short of the previous week’s peak. Gold, on the other hand, closed well ahead of the previous week’s peak on Monday. Then yesterday gold rose by over 2.5% while silver fell by over 3.75%.

Furthermore, it doesn’t look like the downgrade scared anybody because Treasuries are also turning in some pretty impressive numbers this week. The downgrade merely confirmed what most of us already knew and for reasons known only to them, investors continue flocking to US debt for safe haven despite our government’s inarguable fiscal ineptitude and yields that don’t even come close to balancing the risk. Maybe New York Bank’s precedent-setting negative interest rates are making even the garbage smell better.

I think that gold has simply come to its time. Investors are taking their first tentative steps into the market seeking near-term safe harbor while they continue hedging long term with Treasuries. The price of gold might take off now and never looks back or it might take a while to test out its new legs, but either way I believe we are entering a new era in which gold bullion will once again reign supreme.

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Jonathan Monroe

Senior Staff Writer - Gold-Bullion.org