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Gold’s Record Surge—A Rejection of Capitalism?

Monday, 21 Mar 2011 | 4:58 PM ET

The gold trade has been pretty clear-cut for the last 30—even 1,000—years. The yellow metal with a nice weight to it has been a store of value against inflation. But something changed 2½ years ago in the middle of the financial crisis.

Gold Bars
AP
Gold Bars

From 1976 to November 2008, when the consumer price index went up, so did gold, according to analysis by Alan Newman, editor of the Corsscurrents newsletter. Since then, gold has gone up when the CPI has contracted (deflation) or expanded (inflation).

It begs the question, what does a purchase of gold represent?

Surprisingly, many traders said it means an almost nihilistic rejection of our global market system. It keeps going up because more and more people don’t want to play in a capitalist system where banks are still too big too fail, the Federal Reserve buys Treasuries in the open market and countries openly, and in a coordinated fashion, try to devalue paper assets right before our eyes.

“I think of gold as a protest vote in the ballot box of capitalism,” said Nicholas Colas, ConvergEx Group chief market strategist. “You don’t necessarily think your candidate is going to win, but you want the people reading the election results to know you aren’t happy with any of the pre-packaged choices.”

Bullion futures closed less than 1 percent from a record close Monday, up more than 80 percent from when its correlation with CPI ended, which coincidentally occurred during the aftermath of the biggest financial crisis since The Great Depression.

“We see as much uncertainty about the future as we have seen in decades,” wrote Newman in his latest newsletter. “Doubts about the housing market, the financial condition of consumers, the federal government, state governments and municipalities are still quite apparent.”

Newman added, “The frauds of the complicit nature of Wall Street have shredded the confidence of investors.”

Last week, the G-7 announced a coordinated effort to weaken the yen to boost Japan's economy in the wake of the tragic earthquake. The move has caused a breakdown in the dollar, which has already been on a downtrend since our own Federal Reserve began the purchase of $600 billion in Treasuries in order to keep interest rates artificially low.

These interventions have made gold the asset class for those who feel this isn’t really a free market played by the rules, so therefore paper assets aren’t worth what Wall Street says they are.

“The current price of gold represents a growing mistrust of all fiat currencies and, more specifically, a demotion of the U.S. dollar from its position as the safest asset,” said Jim Iuorio, managing director of TJM Institutional Services.

Add in geopolitical tension and it’s hard to think of a scenario where gold goes down. That’s what has some traders worried about it.

“It is a trade that is called both a deflation hedge and an inflation hedge depending on whom you are listening to,” said Josh Brown, money manager and author of The Reformed Broker blog. “ For this reason, we can say gold is a trade with many different types of holders involved for a spectrum of different reasons and rationales. Will be fun watching them all try to squeeze through the exit at the same time.”

After all, unlike equities, which pay dividends and have a break-up value, or bonds, which have a principal and monthly coupon payments, gold is only worth as much as the next person is willing to pay for it.

“Gold has no valuation, no metrics, no commercial use,” said veteran commodities trader Dan Dicker. “It’s the world’s most respected ponzi scheme.”

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


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Trader disclosure: On March 21, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Guy Adami is long (AGU); Guy Adami is long (C); Guy Adami is long (GS); Guy Adami is long (MSFT); Guy Adami is long (NUE); Guy Adami is long (INTC); Guy Adami is long (BTU); Steve Cortes is long (TM); Steve Cortes is long (GS); Steve Cortes is long (CSX); Steve Cortes is long (SDY); Steve Cortes is long (SO); Steve Cortes is long (S); Steve Cortes is long Crude Oil; Steve Cortes is short (F); Steve Cortes is short (C); Steve Cortes is short (UNP); Steve Cortes is short (SPY); Steve Cortes is short (DBA); Steve Cortes is short Wheat; Steve Cortes is short Soybeans; Steve Cortes is short AUD/USD; Steve Cortes is short CAD/USD; Steve Cortes is short EUR/USD; Tim Seymour is long (T); Tim Seymour is long (CCJ); Tim Seymour's firm is long (POT); Stephen Weiss is long (MSFT); Stephen Weiss is long (VZ); Stephen Weiss is long (QCOM); Stephen Weiss is long (CF); Stephen Weiss is long (JPM); Stephen Weiss is long (FAS); Stephen Weiss is long (HBAN); Stephen Weiss is long (HPQ); Stephen Weiss is long (MEE); Stephen Weiss is long (CNX); Stephen Weiss is long (DVN); Stephen Weiss is long (COP); Stephen Weiss is long (HK)

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