Do You Have The Gold Bug?

The Federal Reserve has flooded the financial system with liquidity. This drastic production of dollars and the extraordinary growth of the Monetary Base should reduce the value of the dollar, create hyper inflation, and cause gold to escalate. I could see gold heading to $2000.

So why has gold been moving down. I think there are two reasons and both are short-term in nature. We have not seen any inflation yet. In fact, we are witnessing the beginning of a deflationary environment. The weak economy globally has resulted in most, if not all, commodities declining precipitously. Oil is leading the charge but copper is also falling like a rock. Lower commodity prices will deflate the cost of products that use them as inputs. A deflationary environment is likely to temporarily halt the inevitable rise in gold. Gold thrives on inflationary expectations.

Commodities is the first reason for gold's weakness and the strong dollar is the second. Typically, low interest rates and a weak economy lead to a weak dollar. In the current state of the global economy, the U.S. is in bad shape but most of the world is in worse condition. Hence, the U.S. looks like a place of stabilty to the rest of the world and global investors want to hold on to dollars. This has produced a major strengtheneing of the dollar in the past month. A strong dollar typically results in weaker gold prices.

These theories seems plausible for the short-term but there is no free lunch. The government can't keep printing money without consequences. Too much money must mean inflation is around the corner. The question is when that will occur. Today we see deflation and a strong dollar but those trends will change. Gold may not be moving up today but at some point, it will roar like a lion and be a great investment.