Gold and the Crisis

"A gold 'rally' doesn't quite describe it. The flight-to-quality stampede by investors left gold traders craning their necks to see just how high and how fast the metal could climb--as financial markets undergo their biggest upheavel in 80 years. ... Short-term, volatility in gold pricing--while it may not remain at September's levels--is likely to persist, as participants mull details of the plan to backstop markets. But the medium- and long-term implications of Washington's market-rescue plan for the metal will also hinge on the reactions of the U.S dollar and inflation. Indeed, if the rescue works longer-term, it will likely prove supportive of the U.S. economy and the U.S. dollar, says Carlos Sanchez, precious-metals analyst with CPM Group. ... Even if the U.S. monetizes only some of that debt, especially keeping in mind Uncle Sam's recent bailout of [Freddie and Fannie], that will add to rising inflationary pressure down the road, factors that are likely to remain bullish for gold as a hedge against rising prices. A Merrill Lynch research note observes, that 'once the immediate liquidity crisis subsides, the market should focus on the fiscal implications of the recent measures, putting heavy downward pressure on the U.S. dollar. A weaker U.S. dollar should help support gold prices, as the two markets have been closely linked in the past year',' my emphasis, Matt Whittaker at Barron's, 6 October 2008.

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