Gold prices surged to a new high Tuesday on news that India's central bank bought $6.7 billion worth of gold from the International Monetary Fund (IMF). December gold jumped as high as $1,087, before settling at $1,084.90 an ounce on the NYMEX breaking the previous record of $1,072 an ounce on Oct. 14. Prices are now up 22.7% for the year heading for a ninth straight annual increase. (Fig. 1)



Unusual Correlation

Historically, gold moves in an opposite direction to stocks because of bullion's traditional role as a safe haven in times of crises. But gold has recently climbed in tandem with rising equities. For example, the Dow Jones Industrial Average, a bet on the economic recovery, is up about 15% this year. (Fig. 2)

This unusual correlation is driven mostly by excess liquidity, return of risk appetite, and a weakening U.S. dollar. The creation of the U.S. national marketable debt to a record $7.01 trillion to revive growth, along with the Federal Reserve's maintaining the benchmark interest rate near zero since December 2008, and the prospect of heavy government borrowing to fund deficits, threatens to weaken the dollar and fuel inflation and increased economic volatility later.



Economic uncertainty, inflation worries and the weakening U.S. dollar helped push gold to a new high this year. Weakness in the dollar benefits gold, which is often used as an alternative asset hedge to a depreciating dollar. The Dollar index (DXY) has declined about 10% this year. (Fig. 2) Right now, the general trend is still for further dollar weakness on the back of the Fed's easy monetary approach, which will be supportive for the whole commodities complex.

Gurus Now the New Gold Bugs

During the bull market just a few years ago, gold was the last place people would look to put their money in for an asset class. Nowadays, almost everyone from investment gurus to store clerks is either piling into or at least talking about gold.

Fund manager John Paulson increased his bets on gold this year, while David Einhorn of Greenlight Capital was buying gold for the first time. Andrew Hall, the star trader of Philbro, has also reportedly been buying gold this year.

Meanwhile, Paul Tudor Jones, also told clients on Oct. 15 that the time to hold gold is now "as faster inflation and increased purchases through exchange-traded funds, and by central banks boost demand amid stagnant mine output."

Roubini: Gold Has Nowhere to Go

Contrasting to the renewed enthusiasm in gold, Dr. Nouriel Roubini, in a recent interview with IndexUniverse, says gold will go up only for two reasons: inflation or another Armageddon depression.