Data Diary

Memecheck – ‘Contagion’ is not a good thing

Posted on 28 April 2010

One really interesting under-current in the sell-off in global markets overnight was that gold was up on the night.  Is this a sign of things to come?

Gold, and the precious metals complex more generally, has kept pace with the stupendous rally in equity markets over the last 18 months.  There have been various theories put forward as to its strength.  For mine, the attraction is that gold is still perceived as a store of wealth and, importantly, that it cannot be corrupted by dilution.

(Notwithstanding that it is patently clear that the gold banking fraternity have indeed been able to effectively print gold by offering their balance sheets up as collateral against cash-settled ‘gold’ – but that’s another story – Zero Hedge has been covering this with their usual gusto.)

With the European sovereign debt seraglio now entering the public consciousness as “contagion”, trust in governments is going to be put to the test.  This is critical cause our governments are all over the global economy in a way that we haven’t seen for a very long time.  The debt markets are beholden to government funding requirements.  The currency markets in turn are awash with government pin risk.  To top it off, a good slab of the private economy is subject to government support in one form or another – think housing whether it’s in Australia, the US or China.

Contagion in this context has nothing to do with swine flu.  But is has everything to do with capital fleeing those markets that are subject to government risk.  And my guess is that we will see a new spike in the use of the term when Google Trends catches up to current events:

The relative strength in gold overnight is a harbinger of what would happen if markets lose faith in their governments. Let’s hope that the ‘muddle through’ strategy can get back on track – cause if gold does shoot higher on a flight from all things paper, then it could get downright messy once more in the global markets for risk.