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Cold War Redux — Good for Gold

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For the past year and longer, financial-market expectations of U.S. Federal Reserve interest-rate policies have been the single-most important determinant of day-to-day fluctuations in the price of gold.

Indeed, the persistent widespread belief that the Fed would soon start weaning the markets off near-zero interest rates, however wrong, has weighed heavily on gold prices while fueling bubble-like conditions in many other asset markets – most notably equities, long-term bonds, the U.S. dollar, New York apartment prices, collectibles of all sorts, etc.

All the while, gold has virtually ignored the various geo-political hot-spots that years ago would have fueled safe-haven demand and a rising price for the yellow metal.

But now it seems that gold may be resuming its historic role as the “asset of last resort.” Indeed, with Russia flexing anew its muscles in the Middle East, it looks increasingly like America cold-war adversary is again competing with some success for influence on the world stage.While “private investment demand” for gold may be just beginning to react to worsening tensions on the geo-political front, America’s former red rivals, Russia and China, each acting independently, have been quietly buying and building their official central-bank gold reserves, each with annual purchases often in the one-hundred to two-hundred ton range, and some years higher.

China and Russia are, respectively, also the world’s first- and third-largest gold-mining nations – but unlike other major gold producers these two would-be economic superpowers are buying just about every ounce they produce, assuring that much of the world’s current gold-mine output never reaches the world market.

In sum, recent signs of weakness in the U.S. and world economies suggest that near-zero interest rates, as measured by the Federal Reserve’s Fed Funds rate, are likely to persist well beyond financial-market expectations.

At the same time, Russia’s bold military actions in the Middle East are just now starting to fuel rising private-sector investment demand for gold as a hedge asset and dollar alternative.