Inflated Gold or Inflation?

By: Jim_Farrish

The price of gold has moved back to $1360 gaining nearly $40 the last two trading days. The intraday high was $1388 just two weeks ago. The pullback to $1320 invited those who think gold prices are inflated to pontificate about the metal correcting. There have been some analysts who believe gold will drop to $1000 before year end. Of course on the other side there are those who see gold at $2000 before year end. Since testing support near the $1150 level in July, gold moved up more than 20% before this recent pullback, which has been the rationale for gold prices being inflated.

Why the sudden reversal for gold prices last week? Simply put, the FOMC meeting which concludes on Wednesday. The assumption is more stimulus which equates to inflation on the horizon. Or is it already here? Chicago PMI was released on Friday posting 60.6 and well ahead of the 58 expected. On the surface the number was impressive for the economy and expansion in the Midwest. New orders were much better, but prices jumped. That is a sign of inflation, and in response gold moving higher on Friday.

The weak dollar isn’t helping the situation either. This causes the US to import inflation. We are buying the same goods at higher prices due to the decline in the greenback. The trade deficit has been rising as well showing the impact of the dollar. The argument for devaluing the dollar to increase exports sounds good on the surface, but the reality tends to lean towards inflation.

The ISM manufacturing and services data will be released this week and provide further insight into the inflation pressure on prices. The PPI (Producer Price Index) data several weeks ago showed inflation pressure at the producer level. While not excessive it is putting concern in the consumers mind. Prices are starting to rise at the consumer level as well. The most notable sign recently came from McDonald’s announcing a price increase.

Below is a weekly chart of Gold since 2002 when it bottomed near $250 per ounce. The uptrend is clearly still intact, but looking at the rise you can understand why some analysts believe the price of gold to be inflated. However, if inflation is starting to heat up, it will serve as the catalyst for prices to continue their run higher.

The chart below of Silver shows a similar rise in price with some extreme volatility, but the results are equally impressive. Gold jumped 1% on Friday, but silver rose 2.8%. The upside potential for silver could be even greater in respect to returns.

All eyes will be on the data points in coming weeks looking for further evidence to validate the inflation argument for gold versus the inflated price of gold. If the Feds additional stimulus in the form of quantitative easing is deemed to be excessive following the FOMC meeting, it will become an additional stimulus to precious metals.

Jim Farrish is the Founder and Editor of SectorExchange.com and TheETFexchange.com.  His primary goal is to educate people about investing.  He has taught workshops locally and nationally for over 25 years, teaching thousands of individuals, business owners, and advisors how to focus on achieving financial independence.  Jim Farrish is the CEO of Money Strategies, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Money Strategies, Inc., web site.

© 2010 Copyright  Jim Farrish

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