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Inflation News...and Gold Looking Overbought in the Short-term

Commodities / Gold & Silver Nov 07, 2007 - 12:27 AM GMT

By: Emanuel_Balarie

Commodities Best Financial Markets Analysis ArticleGoogle News is my friend. With a click of a mouse button I am often able to get a quick snapshot of what is going around the world. If I want to find out something about a certain issue, I simply type in a word or two, and read dozens of stories from across the world. Whenever I do this, I don't try to look for certain angles or viewpoints, but I simply want to see what is “factually” going on globally. Interestingly, this strategy often gives me a much better glimpse of economic reality, than if I would listen to financial pundits or even commentary from Bernanke.


Today, I decided to simply type in “food prices”. Below is a list of a few storylines that I found:

From this simple search, it seems obvious to me that food prices are heading higher in Poland, Taiwan, Hungary, UK, Philippines, and Russia. If this is the case, what about food prices in the United States? Well, you don't have to be a Federal Reserve chairman to figure out that if food prices (and inflation) are escalating globally, they most likely are escalating in the United States too. If the food grocer in the UK is paying more for food products, then it's likely that the US grocer will pay more as well. If Russian pensioners are having trouble meeting their living costs, this same problem will most likely affect US senior citizens that have a fixed retirement income.

Bernanke...

All of this makes sense to me, but it fails to resonate with Bernanke and friends. The Fed's actions last week to cut rates, and subsequently flood the market with even more money, clearly showed that they would rather try to keep the US from heading into an inevitable recession than fight inflation. Consider the Fed's comments from last week:

"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."

What is interesting about the above statement is that the Fed believes that “recent” increases in energy and commodity prices have put renewed upward pressures on inflation. Correct me if I am wrong, but energy and commodity prices have been rising for the past 6 years! Is the Fed truly oblivious to the inflationary pressures?

I don't thinks so. It is my opinion that the Fed understands exactly what is going on. However, I believe that they have mistakenly chosen the path of least resistance. In their eyes, the path of least resistance is lowering interest rates, alleviating the concerns of Wall Street, and attempting to temporarily delay a further collapse in housing. Unfortunately, this action is similar to any type of short-term remedy….it might temporarily solve something… but it's just that… a remedy.

If you are waiting for the Fed to solve the inflation problem, good luck! Instead of complaining about the Fed, it time for most investors to finally take the bull by the horns. Buy Gold, find an inflation hedge, and diversify your wealth from US dollar assets. For the first 6 years of this bull market, I have been espousing how you can profit from the rising commodity prices. I even wrote a book titled, Commodities for Every Portfolio: How You Can Profit from the Long-Term Commodity Boom . And while I still feel that there are ample opportunities to profit from the upward movement of prices, it is more important to start using commodities to protect oneself from the inflation and the erosion of your wealth. Commodities For Every Portfolio presents the case for how commodities serve as a hedge against inflation and the various ways you can protect yourself. You can find out more about the book here or listen to an interview with Jim Puplava of FinancialSense :

Gold Outlook

Many of you have read my commentary over the last several years, and have understood that I am a firm believer in this gold bull market. At one point time, The Wall Street Journal called me a “bull of a gold bug” simply because I believed that gold was going to break $600/ounce in 2006. I argued on countless occasions against other CNBC pundits why I believed that gold prices were still cheap and that we had at least another 5-7 years left in this gold run.

But, as bullish as I am, I find it hard to believe that gold prices will move up in a straight line. I also find it hard to believe that the US dollar will collapse within a short-period of time. As such, every once in awhile I caution that gold prices have moved up too fast and are due for a pullback. Take a look at the following charts of gold and the US dollar. Gold is clearly in an overbought situation and the US dollar is in an oversold position.

If you are a short term or intermediate term trader, it might not be a bad idea to take some profits off the table. I wouldn't be surprised to see gold pull back to the $740-$760 range. If you are in this for the long-term, and concerned more with wealth preservation, don't worry about it. This is will be just another consolidation in gold's move to $2000/ounce.

I have recently launched the beta version of CommodityNewsCenter.com, a website that focuses on the commodity news, quotes, and information. I encourage you to visit the site, view our daily CNC Market Summary , and sign up for our free newsletter .

By Emanuel Balarie

http://www.commoditynewscenter.com

Emanuel Balarie is a highly regarded advisor who advises high net worth individuals and institutions on the commodity markets and managed futures investments. Mr. Balarie’s research has been published internationally and has appeared recently in The Wall Street Journal , Reuters, and Money Week , as well as on CNBC and MSNBC.

Emanuel Balarie Archive

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