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Gold Caught In Inflation Tug-o-War


Which way will government pull?


Gold continues to gyrate in an utterly frustrating manner. A couple of weeks ago I Buzzed that I had once again gone long gold futures, based on my belief that we have entered an extended period of competitive currency devaluations between countries: a necessary move to combat the ongoing bout of deflation across asset classes.

Back then the chart pattern for gold looked much more promising than it is right now. On the other hand, we now have a meaningful positive divergence between the price action and the "rate of change" of price. On the other hand, there's always some indicator out there that can support one's underlying thesis.

The bottom line is this: In my opinion, there's no debatable issue as to whether the government is desperately trying to inflate its way out of the current mess. The US monetary base has gone parabolic, and that is a coconut-sized seed for future inflation. The multi-trillion dollar question is something we have beaten to a pulp in the 'Ville: Will the base find its way in the economy, where the multiplier effect will then create a hyperinflationary explosion in the money supply? Or will this base will sit and rot in the coffers of banks who are too scared or too capital starved to lend it out, and deflationary forces will then persist?

Gold is caught in this tug-of-war. The reason I have positioned myself on the side of inflation may be overly simple, but, it's good enough for me. From a cultural and historical standpoint, I believe the United States government will not accept another deflationary depression, even if it means creating and injecting currency rather than credit into the system.

So while gold may swing wildly as the government finds itself moving toward inflation, I think odds are better than not that it will ultimately succeed.

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Positions in YGZ08 and gold equities
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