The Simple Reason Why Gold Will 'pop' In A Market Crisis

For awhile it looked like the performance of gold might make for one major difference between 2011 and 2008.

In 2008, gold got destroyed as the market tumbled.

Gold, meanwhile, was at $1900/oz. just a few days ago.

Now gold is getting put through the meat grinder with everything else. pretty much only US Treasuries, the dollar and the yen are doing well.

What's the problem with gold? Quite simply, nobody has debts or bills to pay in gold.

think of a financial crisis as basically a period in which everyone is scrambling to raise money to pay their debts. Mostly people have debts in dollars. A lot of people in Europe have debt in euros. There's a ton of yen-denominated debt out there. there's basically no gold-denominated debt (as far as we know). thus gold is a really great thing to sell (to raise cash). Very few people have an acute need to own more of it.

When growth is bad, and interest rates are ultra-low, there's a case for holding gold. When things are getting really ugly though, cash becomes KING.

And Now Asian Markets Are Diving

Update:

In early trading, Hong Kong's Hang Seng is down 2.4%. The Shanghai Composite is down 1.4%.

Earlier:

In the wake of the US market thrashing, Asian markets are waking up to a steep selloff.

However, Korea is getting crushed with the Kospi down 3.4%.

Australia's S&P/ASX 200 is down 2.1%.

Japanese markets are closed as the country celebrates the Autumnal Equinox.

Quick Trivia On The US:

As graduates of colleges and universities are still hunting for jobs, those who are graduating will add to the number of job seekers. In an environment where setting up small businesses are proving riskier in the US due to lower consumer confidence, these students are finding it hard to pay off their student loans on time.

If jobs are hard to come by, banks will be pressured to pose penalties on late payments. These fresh graduates will then begin their career, if any, deep in debt.

Therefore, it does not mean that if unemployment were to decrease, will there be an increase in CPI numbers. These unemployment numbers also reflect the amount of personal debt that they have accumulated over the years just to get by.

FORGET FUNDAMENTALS: Here's what investors really care about right now

In recent meetings with clients, we have debated several topics including the apparently depressed forward PE ratio for the S&P 500 (we take issue with the word "depressed") as well as relative value models that compare equity vs bonds through dividend and nominal bond yields. Unfortunately though, one topic continues to dominate our meetings much to the chagrin of clients; the importance of policy makers in the current environment. At the end of most meetings, we point out to clients that while we would like to spend most of the time debating the academic issues outlined above, the fact remains that our meetings are dominated by discussion of Angela Merkel, Zhou Xiaochuan, Barack Obama and George Papandreou.

On the one hand and in a secular sense, environments in which policy makers dominate headlines are not environments in which investors feel comfortable bidding up stocks. Simply put, PE ratios do not expand in this type of environment leaving organic earnings growth to drive price appreciation (more on 2012 earnings expectations another time).

Secondarily, and today's action is a perfect illustration, policy makers ultimately and unfortunately drive price action and while this helped at the end of the day, news that China was interested in Italian bonds or Italy was interested in China buying its debt drove a significant end of day rally.

The fact remains that investing is made all that more difficult when returns come at the whim of those without a profit motive.