Is Recent Gold Hedging Activity a Warning?
By Vedran Vuk, Casey Research

Many investors have been baffled by Treasuries in the past few days. They've been downgraded, yet investors continue to flee into them for safety. Has the world gone completely mad? No, not at all. Economists have observed this phenomenon for decades; it's known as "sunspots" or "focal points."

Sometimes market participants rally around a certain point regardless of the fundamentals. If everyone agrees on the focal point, they will end up in the same place. Over the years, Treasuries and the U.S. dollar have been the strongest focal points in times of crisis. As a result, it doesn't necessarily matter that Treasuries have been downgraded. Investors retreat to Treasuries because others will too.

Social scientists have done experiments on focal points outside of markets. For example, in one study, ten students were dropped off in different parts of New York City. They were instructed to find each other by the end of the day. Doing the numbers, this seems almost impossible. There are millions of people in New York City. How could they possibly find each other without some form of communication? From a purely mathematical perspective, the odds are slim.

However, the students did find each other. Guess where? Times Square. Though none of them had planned it ahead of time, Times Square was a New York City focal point in their minds. They each headed there and found the others.

The significance of focal points isn't only a phenomenon for Treasuries. What really has me excited is gold's reaction in the past few days. During the 2008 crash, gold initially climbed but then dipped with everything else. Some folks saw it as a flight to safety, while others did not. There wasn't a consensus to push gold higher.

This time around, gold is witnessing a fascinating transformation. As the market crashes, gold has risen, touching a peak of $1780 so far. And more importantly, this spike is obvious to every trader in the market. In my opinion, we're seeing the birth or perhaps rebirth of a new focal point: gold.

Prior to the recent market drops, I heard plenty of gold naysayers for times of crisis - even among gold supporters. They saw it as a decent investment in times of rising inflation. However, in a crash it might not do so well. Others noted, "Well, there might be some flight to safety, but those will be offset by the lower demand for jewelry." So far, they have been wrong again.

If gold stays afloat over the next few weeks, everyone in the world will take note. This could be one of the most important moments for gold in the past decade. The old flight to safety, Treasuries, shouldn't be worried about the downgrade. Rather, it should be worried about the rebirth of the competition, gold. There's a new flight to safety in town.