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What Happens to Precious Metals If Stocks Plunge?


Gold and silver are still correcting.

The recent tumble in the price of gold came as no surprise to experienced technical traders. We gave you a heads up to close out your speculative gold positions before the beginning of the correction. Keep in mind that even the strongest bull markets need to pause and correct before moving higher. I'm not even sure that the decline we've seen so far should be labeled a correction.

Sometimes to see the future it helps to look at the past. I like history, and today I want to take one item from the history pile, shake off the dust, and see what we can learn.
It's an obituary for gold that ran in the Financial Times 12 years ago. The title couldn't have been more dramatic: "Death of Gold."

I read it with astonishment pondering how in the fast-paced world, economic reality can change profoundly in a mere blink of the eye.

The article begins by saying that whereas the Three Wise Men deemed gold to be a gift fit for a king, a better gift today (meaning 12 years ago when this article was written) would be US Treasury bonds.

I can almost hear some of you laughing. Who today would prefer a US Treasury bill to gold?

The article goes on to say that "a new breed of central banker is not dazzled by gold and sees little point in having an asset that just takes up storage space."

And therefore, in 1997, the year in which this article was written, the Netherlands sold 300 tons of gold, Australia had reduced its gold reserves by two-thirds, and Argentina had sold its entire gold reserves, all 124 tons, and invested the proceeds in US Treasury bonds. Two years later, the UK dumped most of its bullion reserves at prices below $300 an ounce.

Contrast that with today's scenario. Central banks around the world are frantically trying to get away from their US Treasury bonds and purchase gold. After India's central bank bought 200 tons of gold from the International Monetary Fund last month, more central banks are joining the stampeded to step up their gold reserves. Just a few days after the India announcement, the Central Bank of Sri Lanka announced that it had increased its gold reserves by an undisclosed amount.

Russia's central bank has purchased 180 tons of the precious metal on the open market since June 2006 and just recently, media reports from Moscow indicated that Russia's state repository will sell 30 tons of gold to Russia's central bank. China's central bank said in April that it had built up its gold reserves by 454 tons since 2003 to 1,054 tons, making it the world's sixth-largest holder of the precious metal.

Things are 180 degrees different than when the article was written 12 years ago.
The Financial Times article concludes with the following paragraph:

When it comes to bullion as an investment, and as a measure of national wealth, gold is a goner. The reverse alchemy is almost complete. Eddie George, governor of the Bank of England, like Fort Knox, one of the great citadels of gold, recently told a European parliamentary committee: "Whereas gold used to be seen as a good asset, it is now seen as the bottom of the pile."

If you look up the definition of "sound money", Wikipedia describes it as "a globally traded currency that can serve as a reliable and stable store of value."
It seems that 12 years after the obituary for gold was written the new definition for "sound money" should be the kind of money that makes a metallic sound when you throw it on the table -- gold.
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No positions in stocks mentioned.
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