Gold Bars
As the U.S. stock market surges ahead yet again, gold prices continue to drop. This is the typical response from investors during equity booms. Climbing stocks lure investors away from safe-haven investments like gold and silver, the temptation of potential gains being just too attractive to resist, even if they are fleeting.

Bloomberg reports that “the Thompson Reuters/University of Michigan preliminary December index of consumer sentiment increased to 93.8 from 88.8 last month. That beat economists’ projections. Bullion also declined today as crude futures retreated, cutting demand for gold as a hedge against rising consumer costs.”

This is a complete reversal from earlier last week when plummeting oil prices and weakening global economies caused big drops in the stock market, leading investors back to gold and silver. Many analysts have now taken the stance that the U.S. economy is improving and this could lead to ongoing equity gains.

“The engine of the U.S. market is continuing to improve, and that’s the biggest bear for gold,” Miguel Perez-Santalla, a sales and marketing manager at Heraeus Metals New York LLC, said in an interview with Bloomberg. “The economy is booming. Jobs are starting to increase, and for the first time I think the U.S. is starting to get off the ground.”

What a difference a day makes. There are signs pointing towards economic recovery, but it is difficult to believe that the sentiment will last, when just a few weeks ago everyone was writing about how the global climate has led to a jump in gold prices.

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Gold is typically used as a hedge against inflation. Some analysts believe the current jump in equities is tied to evidence of deflation, but Avi Gilburt of MarketWatch disagrees.

“Many are currently looking at the decline in the commodity complex and the rise in the dollar as a sign of deflation,” Gilburt says in a recent article. “But, the equity markets aren’t supporting such a conclusion. And, even if we see a turn in the equity markets, I don’t think the patterns are such that suggest deflation is going to be a strong imminent threat. Well, at least not for several more years.”

Gilburt goes on to point out that deflation is not necessarily a bearish indicator for gold. There is plenty of historical evidence of gold thriving during periods of deflation just as there is evidence of it thriving during inflation. This means there must be other major drivers to take into consideration when trying to predict the future of the yellow metal.

The main driver, Gilburt believes, is fear. As long as there is “fear” in the air (e.g. fear of inflation, fear of war, etc) then there can be a period of deflation even while both interest rates and precious metal prices are rising. This rare scenario is called “rising yield deflation.” Gilburt calls it “The Perfect Storm,” and he thinks it will be here within the next decade.

This mass disagreement between analysts really only tells us one thing: we are in new territory economically. The usual indicators are failing and this is leading to a lot of mixed messages. One thing is clear at the moment, however, and that is that gold is still a safe-haven and a hedge. Prices may be volatile at the moment, but in the long term gold has a proven value to serious investors.