Gold's bullish case remains despite G-20

Misplaced optimism

Recently there's been a wave of optimism that the worst of the economic malaise is ending and that sentiment has manifested itself via a strong performances in equities and corporate bonds. The fact is growth in the U.S. is still relatively weak, Europe continues to look anaemic, Japan appears no closer to a genuine sustained recovery and there are worrying signs of a China bubble.

It's probably only a matter of months before the financial markets are once again in turmoil over fears of recession brought on by a resurrection of the Eurozone crisis, U.S. political disagreements over fiscal policy or just a run of poor economic data. If policy makers remain true to form, then the response will be to do more QE.

So far the main activity being stimulated by QE is not in the real economy, but the financial one and particularly speculation. There's a serious risk that ongoing monetary stimulus will eventually go from distorting market valuations to causing deep instability in the financial system followed by another crisis.

At some point central banks will probably give up on QE, reasoning that the balance of risks outweighs positive outcomes. Until policy makers come to that conclusion, there's still a bullish case to be made for gold.

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About the Author
Justin Pugsley

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.

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