Today’s Lessons

In 2008 gold was treated like any other high risk asset when the collapse of Lehman Brothers sparked heavy selling across financial markets in a widely-documented “dash for cash” — after which it bounced back hard to record highs. In Q1 2009, the gold price recovered long before other assets hit bottom.History would suggest that while gold has taken a beating, it is far from down and out.Monday’s tumble to around $1,535 an ounce dragged prices 20 percent below the record $1,920 reached last Thursday. But since its rise from just over $250 in early 2001, gold has bounced back from bigger drops, having fallen 25 percent between May and June 2006, and 27 percent in October 2008.General financial market volatility is a threat to any asset.Signs that gold was ripe for a correction were rife after its sharp rally to record highs in early September — which saw it surge by 28 percent in just over two months — was followed by a period of intense volatility.The rise in volatility taking place in the gold price was clearly an indication that gold was no longer a low-risk asset.Now there  is an unwinding of much of recent move over last two to three months. It’s too early to say whether it’s the big burst. It could be, but it’s equally possible that it could be what allows the market to push over further highs over the next few months, especially if there is an inflationary environment,negative real interest rates and/or uncertainties.Holdings of gold-backed exchange-traded funds have remained relatively steady during recent sell-offs, suggesting they have been reasonably resilient to short-term moves.

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As the world’s reserve currency, the dollar has become a reverse indicator of the globe’s economic health. Whenever things are good in the world, the dollar goes down, since there’s ample liquidity. But when the rest of the globe is doing poorly, there’s no liquidity and therefore the U.S. dollar is worth more. This is the most important thing to know about foreign exchange nowadays.