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What Does Gold's Strength Mean For Markets?


As of this morning gold priced in Yen is at 84,500 and rising, not because the yen is weaker against the U.S. dollar...

I wrote last week that gold in yen was something I was watching very closely and that a break above 83,000 yen could set off some fireworks. As of this morning gold priced in Yen is at 84,500 and rising, not because the yen is weaker against the U.S. dollar (the yen is actually much stronger against the USD this morning).

Gold is the strongest relative performing currency right now. This is very telling and has profound impacts on what the markets are going to tolerate from the world's central bankers. When an investor flees to the safety of gold, they are effectively striking against paper currency. So the breakout in gold priced in yen tells me that the strike against paper currencies may get more severe now as investors see this and pile into an asset that no one can print or create out of thin air.

And if investors (savers) don't want to lend out of fear that the fiat money will attempt to be devalued by the central banks, the world financial system has obvious problems. And gold and other hard assets is where investors will flee. There are two ETF's that one can use to gain exposure to gold (GLD) and gold stocks (GDX).

One interesting development is the performance of the duration carry trade that I wrote about last month. Indeed, we are seeing the duration carry trade players getting hit on the currency risk and the duration risk for the first time today. This is not coincidental to gold breaking out in both yen and dollars.

Another development is the absolute performance of the U.S. treasury bonds. The long end of the bond curve is selling off (Interest rates are rising) as the dollar becomes much weaker and the inflationary fears that result from a weak currency. An investor in this environment must be very careful about the duration of their bond investments right now. There are ETF's that cover the duration spectrum from short term treasuries (SHY), which are fairly stable, to long term treasuries (TLT), which are much more volatile and therefore risky both on the upside and downside.
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