Is Gold Still in a Bull Market?

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...The dynamics of the ongoing financial crisis can be summed up in the escalating tension between inflation and deflation...The options for government policy are stark: either let the burden of debts further crush economic activity, or crank up the printing presses to devalue paper currencies so as to relieve debt burdens. The question for anyone on the sidelines contemplating gold is whether it is possible or necessary to time perfectly a strategic commitment to the one asset class that will survive and most likely benefit under either outcome.

Since the Bear Stearns bailout at the end of the first quarter, the backdrop for gold has unfolded in a more positive way than almost any of its proponents could have imagined. The government takeover of the GSEs, the Lehman Bankruptcy, the disappearance of blue chip investment banks, and continuing intense credit market stress despite the Paulson bailout of the financial system have generated successive new highs in the climate of fear overhanging the financial markets. These successive highs in stress can be measured objectively in the shrinking yields of short dated government securities and escalating credit spreads of all descriptions.

In light of all of this, why hasnít gold done better? Year over year, gold bullion is up 25.9%, but is well below its peak price above $1000/ounce six months ago. Gold shares have not participated in the flight to safety and have in fact provided disappointing returns over the past six months, during one of the most intense financial market panics of recent history...

Given goldís disappointing behavior thus far as the credit crisis unfolds, it is understandable why so many investors appear to remain on the sidelines. The bull market in gold is intact. The dynamics of the ongoing financial crisis can be summed up in the escalating tension between inflation and deflation. The market-induced deflation of asset values and income streams comes at a time when debt relative to GDP is at all time highs. The options for government policy are stark: either let the burden of debts further crush economic activity, or crank up the printing presses to devalue paper currencies so as to relieve debt burdens. The question for anyone on the sidelines contemplating gold is whether it is possible or necessary to time perfectly a strategic commitment to the one asset class that will survive and most likely benefit under either outcome. Read full article, gold-eagle.com.

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