Gold continues to be the investment of choice in moments of crisis. With the devaluation of the dollar and the increased domestic spending by the US government, other countries have flocked to Gold for reserves instead of continuing to accumulate US dollars. At some moment, the Euro was becoming the currency of choice, but it is just another currency, and it seems to fluctuate rapidly with recent budget crises in smaller European governments.
The US government has always been seen as the safest of investments. US treasuries are by definition the risk -free investment. In today's economy with high budget deficits, trade imbalances, and increased borrowing in the US, Moody’s and Fitch are reviewing lowering the credit score of the US government. It won’t be a hard review, but it is a noticeable development. This is just a sign of the increased uncertainty about the future of the US economy. The recent quantitative easing by the US Federal Bank has made major investors wary of inflationary pressures and they expect the continued devaluation of their own reserves as a consequence.
In the other side of the globe, China has started to take precautions on inflation which was reported at 5.1% this past November. Among other measures, China has been raising interest rates, and it has allowed corporations to keep their profits outside of China to diminish the liquidity in its local market. China has also started to allow market forces to close certain high polluting and energy-wasting factories. This will allowed them to slow down manufacturing which will restrain the liquidity in the market by slowing down the demand on manufacturing inputs and commodities while lowering payroll at the same time.
With all these developments, Gold continues to be the investment of choice. But at the same time, Gold has become the index of the sum of all fears. In recent days, optimistic US job reports has caused the decrease of Gold prices. Gold prices are adjusting rapidly to new information. Even without investing in Gold, Gold can still serve us well as the overall index of the world economy.
