1. Asset prices are a nascent or hidden form of inflation or deflation. i.e. Inflationary if the market needs to be recapitalised in order to refloat under-performing asset prices, or deflationary if asset prices were to collapse. Of course the Fed and no government is going to allow asset prices to collapse terribly, at least not in the property market because that would destroy credit. Credit or derivative transactions in equities are equally split, long and short, so no problem.
2. The threats to the global growth outlook, whether in the form of war or disruptions like oil shocks. We have in recent weeks seen ISIS in Iraq challenging the home security forces of the Iraw government. If these are destined to have the upper hand, we might expect Iraqi oil exports (4% of the export market) to be hit. This is not a huge market, particularly given the soft market conditions, however it will lift prices as a sepculative issue. Would it prompt a re-entry of the US? I suspect it would result simply in air strikes, with drones and targeted missile attacks.
Now, the prospect of cheap credit and an endless pool of super savings going into global markets is destined to lift stocks. Japan is planning to plant some huge some of domestic savings into the global market place to lift earnings. This is destined to lift interest rates in Japan, though given that rates are soft elsewhere, its not going to be excessive. Of course we are going to see higher equity and international bond prices. This is going to drive asset prices higher, and of course, in these conditions, gold will start looking appealing, simply because all other asset prices will be high. Is this reason to hold gold? No, but there will come a point when it wll, and of course there is equity exposure that can make more sense. i.e. Miners who are low-cost producers.
Asset bubbles tend to correct rather quickly; so its not the 'inflation story' which is sustained with a wages spiral (which we are not going to see for over a decade). People will tell me wages are rising quickly in the third world, but this is tied to productivity gains (like in the West). Where you can expect some rallies in gold will be with the expectation of market corrections, when only gold looks cheap. In these times, gold makes sense. Even if it falls off with a crash, its destined to be the sector that recovers first...assuming that its assets offer tangible value. i.e. Not blue sky exploration.
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