Thu 8 Nov 2007
A few weeks ago (Sept. 27), I wrote that the rising price of gold was an indication that inflation remains a major concern. Since then, the situation continues to escalate and the price of gold has risen dramatically.
My first introduction to this phenomenon came back in the late 1980s when I went to work for Howard Ruff. Ruff was more or less an economic doomsday guru who in the course of events advised his followers to buy gold to protect themselves from the impending economic disasters. Many of Ruff’s predictions never came to pass, but he was right about rising gold prices. As gold climbed to more than $800 an ounce, a number of his followers who had purchased large quantities of gold ended up becoming very rich.
Of course there were other folks who made lots of money by buying gold 20 years ago. One of the things that makes gold such a volatile investment is that many remember the past price spikes and they have a tendency to jump in and out, each time hoping for another big score.
Below is a chart that shows how the price of gold (black line) has risen over the past two years. Notice that the price of gold turned up in August about the same time as the major market indices rebounded. But unlike the other indices such as the Nasdaq (gold line) gold has not seen a pull back in recent sessions. In fact, the angle of its advance is even steeper.
Under normal conditions, this steep of an advance would be difficult to maintain for more than a few weeks, but with everything else that is going on in the economy, apparently there are lots of investors right now who are willing to place a bet on gold. Given the circumstances, this advance could have some serious staying power. The bottom portion of this chart shows a moving average convergence divergence (MACD) for gold. The MACD is still in positive ground and is moving up, meaning that gold still has the momentum to keep advancing.
Right now precious metals and oil are about the only sectors moving up. So there are plenty of speculators that will continue to jump in if this trend continues.
At Strategis Financial Group, we recently purchased a position in gold for investors holding our Sector Rewards Strategy.
A couple of weeks ago I wrote about the dilemma currently facing members of the Federal Reserve Open Market Committee–the group that sets interest rates and determines economic policy. Normally the FOMC is primarily concerned with keeping inflation under control. Right now there are many experts and analysts who argue that inflation is becoming a significant problem, but the Fed is still lowering interest rates to stave off a recession that could be brought on by the sub-prime mortgage fiasco.
In its latest statement, the FOMC indicated that the inflation situation remains under control. But this spike in gold prices is an indication that there are many would do not believe the Fed can both cut rates and prevent inflation.