Authored by Jeffrey Snider via Alhambra Investment Partners,

Rather than sticking gold in with my last one on collateral, I felt it deserved its own focus. Its duality often puts it on the side of deflation with collateral shortage as the main mechanism. Given that, it wouldn’t have been surprising if gold was collapsing now as it had been during the earlier eurodollar mess after mid-April.

But, as I pointed out here, there are actually three stages of gold.

The first is reflation or inflation, straightforward enough.

The second deflation stage historically isn’t associated with the worst of deflation. It just pushes gold down in sympathy with other commodities.

Then, and who can predict when it flips, what often follows is a fear stage . Markets are struck by obvious liquidity/money problems with collateral front and center. That would otherwise be very gold negative. Instead, the price is supported by its opposite use – the end-of-world hedge.

Gold may be collateral of last resort but many still treat it as a hedge against everything going wrong – including central banks and their numerous big errors (forecasts). Therefore, even with renewed deflation and market liquidations tied right into collateral problems gold has been moving in that other direction – UP.

The timing, second week in October, further aligns with the bigger negatives showing up. Thus, higher gold seems consistent with that third stage rather than the first (and it can’t be the second). From that inference, what must it be like driving such hedging demand given just how bad collateral conditions are indicated (dealer hoarding most of all)?

In other words, if there wasn’t this fear bid, gold would probably be down huge likely more than it was after April 18. That it’s not and is in fact at multi-month highs is a testament to the level of anxiety permeating global markets right now.