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The Unwinding of Leverage
November 5, 2008
Markets around the world are being crushed by the unwinding of leverage by hedge funds and other institutional investors that has slammed both financial assets and commodities. Commodities have been especially hard hit and, although gold has held up better than most other commodities, the metal has fallen about 27% since hitting its high in March while other commodities, including oil, platinum and copper, are down more than 50%. A quote from The Wall Street Journal said that “The reality is that gold has been sold like every other asset class to cover debt or margin calls to preserve capital amidst a fearful and irrational market. As a matter of fact, gold has outperformed most other asset classes over the past few months.”
In fact, gold has performed its traditional role as the asset class of last resort – the one to buy when everyone flees other markets. Although it has been hurt by undifferentiated selling by investors who were left with no other choices, the efforts by the world’s central banks to reinflate their economies will be a catalyst for inflation and additional demand, which point to big gains in the price of gold. Given a choice, governments will inflate rather than allowing their economies to fall off a cliff.
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Copyright © 2010 Blanchard and Company, Inc.
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