Reply #27: Gold Bugs Flying High [View All]

[54anickel]

http://www.thestreet.com/mutualfundmonday/mutualfundmondaygg/10237773.html

The gold bugs are having a summer picnic and everybody's invited.

Surging oil prices and a drooping dollar have pushed gold prices up 5% over the past month to more than $440 an ounce. The big move has precious metals investors atwitter with expectations that the shiny metal finally may be revving up for a big run past $500.

Of course, gold devotees have seen a number of false starts since last fall, marked by a series of so-called lower highs. But with oil now growing comfortable in the low-$60 per barrel range, it's getting harder and harder not to see inflation -- a gold bug's best friend -- in the economy, even if it is not showing up in the economic data.

snip>

A continued rally in gold prices depends on two things: the dollar and oil. If the dollar continues to weaken, as it has been doing lately, and oil prices keep heading higher, as they have been doing, then the implication is that inflation is on the way. That's why gold has been popular lately. It's a great two-way hedge against the dollar and against inflation.

snip>

This point has been very controversial. First of all, inflation is often delayed. Very often people don't realize inflation has arrived until they see it in the data. And by then it is too late.

Also, there is a big argument about the validity of the CPI and PPI. Many economists feel the baskets they track are outdated. Clearly, not only fuel has moved up in price, but health care and education have moved up significantly and it's not truly reflected in the indexes. On the other hand, cheap imported products from China are being weighed too heavily, which skews the data.

more...