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Golden Opportunity

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Economic reality plays to yellow metal's strength.

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As I discussed yesterday, we're once again seeing gold try to dig its heels in and attempt to rally despite the euro slipping half a percent to a new low for the week. Can it hang onto those gains?

If gold can resist the downward tug of the euro today and rally for the first day in seven, this would be an encouraging sign that the metal and its shares are putting in another important low and beginning to diverge back to the upside despite the continuing correction in the euro, just as we saw back during the November-December period.


Click to enlarge

Disinflationary Shangri-La isn't going to appear because the Fed pauses next week. A quick glance at oil still hugging $116 should make that more than clear to any 10-year old.

It's been six straight days of selling in gold based on the fear that a Fed pause next week will mark the low in the dollar, collapse inflation, heal the economy and supercharge the financial markets (and apparently in that order too). If one believes that, then gold should be sold early and often (as I'm sure many shorts have already done).

If on the other hand, one believes (as I do) that stagflation remains, and inflation will continue to accelerate regardless of whether the Fed pauses or what the dollar does over the next month, then gold and its stocks are a buy with both hands at these levels.

Regarding the dollar: Remember, the dollar index bottomed in 1978. It was only after that bottom that inflation really exploded and gold quadrupled over the next 14 months in that stagflationary mess. I for one don't actually believe the dollar index has bottomed yet because I'm not sure Europeans are ready to accept more of the inflationary burden, which they would have to do by cutting rates if the dollar index was to have recently made its bear market low.

But the point is that whether the dollar has bottomed or not is irrelevant as far as gold is concerned, because inflation will continue to accelerate while the Fed is forced to leave interest rates well below the rate of inflation regardless of what the dollar does.
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Position in GLD, gold shares.

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