Credit Markets and the Price of Gold by: Adam Katz November 16, 2008 | about stocks: This week saw a fundamental shift in Paulson's approach to restoring the proper functioning of the credit markets. I have been arguing for some time that the credit being pumped into the market is not finding its way into the system. The way that this plays out has direct implications for the price of gold. {draw:frame} As you can see in the chart above, there was a swift shift in the momentum for gold mid week. What happened was that gold was in a solid downtrend because real rates were seen as being high and the Fed is running out of ammo to lower rates. Then Paulson made his announcement, admitting that the recapitalization of banks is not leading them to lend to consumers. He announced that he was shifting his focus to getting credit to consumers. Following that, gold tried to test $700 as it WAS in a downtrend. However, that shift in policy is inflationary. As I have been arguing, should rate cuts and public credit find its way out to the private market, inflation will hit hard, and seeing as it is unexpected by the market, it would likely be violent. This led to a sharp adjustment upward in price. This once again brings us to the question of credit finding its way into the market. And although the rhetoric from Paulson is inflationary, the question still remains whether or not the Treasury will be able to get private institutions to lend to individuals. In my opinion this could only be done by nationalizing the banks out right thus giving the government power to control the banks lending practices - very unlikely. Therefore I conclude that deflation remains more of a concern than inflation for the time being. Inflation/Deflation The best analogy I have of inflation and deflation is the weather - inflation being a hot day and deflation being a cool one. In general, our credit based economy prefers a little credit growth in the long run, just how most prefer warmer...