Why Liquidity Injections Always End Up in Gold

We are in the middle of a stock market melt-up, fueled by liquidity injected into the US economy by the FED. In an effort to keep interest rates low, the FED has produced a huge stock market bubble.

However, it's not only stocks that have been doing well lately. Gold has moved higher too, and there are good reasons to believe that gold will soon outperform stocks. The logic for this is simple.

Liquidity injections such as the one we are witnessing will always foster market distortions. This is because easy money go into unworkable and overly optimistic projects, while real incomes fall. The purchasing power of the average salaried person goes down, while available cash for investments go up. Cash becomes less valuable and the general public suffers. The real economy takes a hit.

This means that cash going into stocks do so for purely financial reasons. There is not sufficient health in the economy to warrant the investments. People are stampeding out of cash, and seeing that stocks go up as a consequence, there is a rush to buy stocks. However, those who sell into this rally are no less aware of what's going on. They too want to stay out of cash, and the logical alternative to cash is money, i.e. gold.

While gold will go up slower than stocks in the short term, this is unlikely to remain the case. More and more people will want to get out of stocks as the real economy continues to deteriorate. Liquidity injected by the FED will in ever-diminishing degree go into stocks. Rather, it will go into gold. To start with, this will happen indirectly through the stock market. However, at some point, any further liquidity injection will go directly into gold.

Should the FED stop its liquidity injection, the stock market will tank. But gold will remain elevated. It may even continue its upward trajectory because those invested in gold tend to have little debt. They have parked their wealth in gold in order to ride out the coming storm. They have withdrawn from the financial markets. With no incentive to go into stocks, which are everywhere crashing, people will continue to flock to gold with whatever cash savings they have. The ultimate end station of liquidity injections is therefore gold.

By Arnold Price, CC BY-SA 2.0, Link