What’s Behind Gold’s Sudden Turnaround?

As to the broader factors that might be at work here, Axel Merk (left), the president and CIO of Merk Funds says in a new “Merk Insight” newsletter that economic weakness, poor corporate earnings, a dovish Fed compel the market to think better of gold than the lack of respect it has shown in the first half.

Merk, who has been an advocate for gold as a hedge against easy money, does acknowledge the importance of the recent selloff. By freeing gold of speculators, gold can resume its traditional role as monetary policeman, he argues.

And Fed Chairman Ben Bernanke’s retreat from “tapering,” as well as the recent electoral victory of Japanese prime minister Abe’s easy money party, suggest the need for gold to keep watch over loose fiscal and monetary policies.

“As monetary policy appears on a more accommodative path than a couple of weeks ago when ‘exit’ and ‘taper’ talk was all the rage, [gold is] the ugly duckling that gets to shine,” Merk writes in acknowledgement that buyers of risky assets may desire selloff victims.

The fund firm exec also suspects the bloom is off the rose of the supposedly budding recovery, with increasing doubts about the employment and housing axes of the economy. In particular, Merk notes that the U.S. is excelling in the creation of part-time jobs as corporations seek to avoid Obamacare liability. And the real estate boom in places like his Bay Area base are unaccompanied by a construction boom, “suggesting the recovery is all financial.”

These economic tea leaves, Merk argues, are swaying Bernanke toward dovishness, and he notes that Bernanke’s most likely successor, Fed Vice Chair Janet Yellen, is even more dovish.

Add to this mix the “lackluster revenues” we have seen in earnings season so far, and this may explain the sudden turnaround in gold as a still weak economy and looser expected monetary policy draw the vigilance of rising gold prices.