Fortunately, gold doesn’t need inflation to go up. That misperception kept many people out of gold and was one of the reasons why the trade was not actually overcrowded. The dollar is going down, but as Bernanke said, the dollar is only one input to inflation. The US is resistant to inflation in the face of a falling dollar because so much of its trade is internal.
There will come a day when Bernanke’s independence surprises the market, but for now, given unemployment, it is hard to see rates going up, and hard to see the dollar up in a sustained way.
At least the demographic situation of the US is better than Japan’s.
So, no, 8-10% inflation doesn’t seem imminent. Also, in terms of commodity inflation, I have to think that price spikes in energies will be blunted by political and popular will at this point.
Fortunately gold is a relatively useless commodity and may not be subject to the same limits! In itself, rising gold doesn’t hurt “folksâ€.
Chris
How much have you read
In the same way that stocks can run ahead of themselves, so can the price of gold. If the expectations that are underpinning the current price (whatever they may be – high inflation, very weak dollar) are not met, then predictions will fail.
Jason Ruspini is merely reprating the most common argument currently being touted around by the gold bulls; it is neither original nor brave. In the longer term it always pays to bet against the crowd.
Well, there is obviously good people on both sides of the fence. I’ll follow up on this. We will see.
Niall, That bit about “reprating” is complete nonsense since arguing that gold can go up during deflation is clearly not common. I have also not seen anyone else make the argument that the CFTC may impose limits on energies but not gold.
I am the first one to say that markets can get ahead of themselves, and there are people in the trade for the wrong reasons, but it seems that the gold critics (let’s call them FAIL-bugs) are the ones who have been bleating their way to slaughter with tired arguments. Again, I have been hearing “crowded trade” since I got in a year ago.
It does seem a bit overheated at the moment though, and I’m waiting for a pullback to buy more. The biggest danger to gold right now is the risk trade falling apart, although last week gold was strangely resilient in the face of dollar strength and falling stocks. Of course, gold can decouple from risk.
Jason,
a quote from somewhere on the web
“In the past two days, 97% of futures traders report being bullish on gold. This is the highest two-day reading since MBH Commodities began keeping its tally in 1987.”
I mean, isn’t it that simple? The shrewd ones are getting out while the mugs are getting in. You know what happens next.
I was a bit hesitant to ask… but which one are you?
Medemi, that was exactly the sort of thing I was referring to when I said the market is currently overheated. It certainly SEEMS ripe for a drop, but the underlying fundamentals aren’t changed by these short-term oscillators.
But is it a short-term oscillator or a long-term oscillator? I suppose it can be both, and that it is both, which makes your strategy a very risky one.
I could easily argue that in the very short term one has to be bullish about gold because we’re in the middle of a blow-off phase which could carry gold as high as $1400, near term. But eventually the inevitable will happen.
So the way you’re trading this (get out now, buy back on the next dip) doesn’t make sense to me. It looks like you’re putting blind faith in your short-term oscillator while ignoring the long-term oscillator, which could turn out to be a dangerous game.
What ARE the underlying fundamentals? You can’t use gold for anything, it has no practical value whatsoever. It’s what’s in people’s minds that determines the value of gold. And that will change when the guys at the top of the pyrimid decide it’s time for a different perception.
There is no blind faith involved. A lot of trading is about heuristics and when multiple oscillators and sentiment indicators get to extreme levels, it’s prudent to lighten up. When that happens, I agree that it’s actually a crowded trade — as opposed to the “crowded trade” chorus of everyone not in the trade.. itself a rather vocal crowd. But if you’re still long, this strategy isn’t “dangerous” if gold keeps going up.
With the fundamentals of gold, I will actually lean on some common arguments: the history of money, the growth of fiat money supply relative to gold, the slowing supply of gold via mining, the growing demand from central banks (formerly the growth of total fx reserves vs. gold reserves) — and the fact that dollars have zero yield. If dollars were giving me real yield, I might be ready to jettison gold. This is why I was skeptical of the number given here:
http://www.midasoracle.org/2009/11/22/jim-rickards-4000-dollar-gold/#comment-27434
Sentiment and price-normalizing oscillators inherently tend to be short term and I don’t know if you’re going to find a lot of value in differentiating between 90% vs 95% vs 97% readings here. Without looking at specific numbers, any reading above 90% suggests a pullback of 5+% to me in the next 2-3 weeks.. maybe even down to the 1050 level, around where the Indian Central Bank just bought 200 tonnes. At that point the oscillator may be back in the 80s or 70s, with the rate picture basically unchanged.
And gold of course has some practical uses, though they may be irrelevant at the margin.