Getting Nervous of Gold

Clearly we are in a world flush with cash. This has resulted in strong asset prices almost across the board. However, liquidity could suddenly dry up very quickly leading to a downturn in asset prices. Likely triggers for this occurrence are a further slowdown in the US economy or the unwinding of the yen carry trade.

Gold, too, has benefited as can be seen in its recent strength even though the US dollar has been stable. I have made the case before that gold should perform inversely to the US dollar. This relationship may breakdown from time to time but not for long. The abundance of liquidity has encouraged financial institutions to buy a wide range of assets. If liquidity were to dry up, then the same assets that were purchased before could be sold, including gold.

Don’t get me wrong — I am still very bullish on gold in the long-term. On the first sign that the global economy may sink into a recession, central banks around the world will run their money printing presses on full steam. The money supply will explode similar to the 70’s causing asset prices to resume their uptrends, with gold enjoying the greatest rise.

However, caution should be exercised in the near-term. Now is a great time to liquidate assets. I recently took profits in a number of my gold stocks. Currently, I have 70% of my portfolio invested in the gold sector, 10% short on brokers and small cap stocks, and 20% in cash.

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