The New New Gold Rush
CNN Money
The market is off to a scintillating start in 2012 and many of last year's worst performers are leading the charge.
Europe debt worries seem to be dissipating a bit, helping the the euro bounce back. And investors are dumping stodgy Treasury bonds, pushing yields higher in the process. Risk is back.
So why is gold, the quintessential safe haven/fear trade, up about 7% in 2012 too? That's about the same as the Nasdaq.
You can probably thank the world's central bankers for helping fuel a gold rush. The funny thing about gold is that it often rallies when investors are terrified about deflation. But it also moves higher when investors start anticipating inflation.
And nothing cries out inflation like printing dollars (and euros) to try and halt a global crisis.
The Federal Reserve has been buying bonds for awhile to keep long-term interest rates low. Its latest means of doing so, a program dubbed Operation Twist that swaps short-term bonds for longer-term Treasuries, is slated to end in June.
And now the European Central Bank is also doing its part. Many investors credit the ECB's decision last December to allow banks to take out 3-year loans at a rate of just 1% for boosting confidence in Europe.
Demand for this program has been strong, and it seems that some banks have been using the proceeds to buy up the sovereign debt of distressed nations like Italy and Spain.
Gold: No guaranteed returns
Now you might be wondering why I've mentioned inflation so much. So-called core prices for consumer goods were up just 2.2% in the U.S. over the past 12 months. Inflation isn't an issue in Europe either.
But the market is focusing on the future. And as long as the Fed and ECB are in crisis management mode, it's likely that all the money that's sloshing around will eventually fuel inflation. That is bullish for gold, which is a classic way to hedge inflation since it is not a paper currency. It has tangible value.
"The only condition that matters for gold is if inflation expectations are rising. Since the first week of this year, there has been a dramatic repricing of inflation expectations," said Michael Gayed, chief investment strategist with Pension Partners LLC, an investment advisory in New York.
Gayed said that there's no reason why the recent trend of gold and stocks rallying in tandem can't continue as long as central banks keep taking serious steps to tackle the debt problems.
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