That barbaric 5000 year old metal, gold, is just $30+ from $1000 and just a few dollars more from its all time record high. I’m not familiar with any other asset that is this close to its record high and not coincidentally coincides with the dollar index being near its record low. Gold is now up 31% since Oct ’07 when the SPX peaked at 1565. Because gold doesn’t have much industrial use (mostly electronics and dental, 8% of total demand), jewelry (33% of demand) and investment (59% of demand) are the two main sources of demand. India in fact is the biggest buyer of gold jewelry. With high prices discouraging jewelry purchases, the main source of buying this year has come from investments. Why would someone buy a piece of metal that yields nothing and doesn’t have much economic relevance other than looking nice in a necklace? Because it is perceived as another currency that is not a fiat one, because it historically has risen in line with inflation and because it’s perceived as some place of safety. If markets telegraph investor thoughts on the future, gold’s action is an interesting dynamic with the S&P 500 back to 1000 after a rally of 50%, the 10 yr bond yield at 3.70% versus its 47 year average of 6.90%, inflation expectations over the next 10 years below 2% according to the TIPS, an expected July CPI reading of -2.1%, the biggest drop since 1949 and a Federal Reserve that is made up mostly of those who think inflation is subdued and will be for the next few years.
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