Gold, Inflation, And Dollar Degradation

One of the most frequent questions from readers of late has been “what’s up with gold?”. Well, it’s actually fairly complicated.

Click to enlarge:


Photo: Waverly Advisors

The charts on the page above are not strictly correct. Note that we have hidden the axis for the price of gold futures. If created in a more mathematically rigorous manner, the divergence between lines charting CPI and monetary base would be much more significant –leaving the run up in gold visually dwarfed by the

waverly macro

indicators. We created this illustration to make a point however, that the expansion of the monetary base in the US (and much of the rest of the developed world for that matter) has had a pronounced impact on buyers appetite for gold even as inflation levels remain subdued (if not quite deflationary –as today’s CPI readings illustrated).

Internally, the debate between our tactical analysis and our strategic analysis of gold prices can be summed up as follows:

  • Tactically we discount the traditional perception of gold as an economic sentiment barometer with a particular sensitivity to inflation. Instead we ascribe much of the action in recent years to simple momentum/trend following by managers who are being capitalised by fearful investors. In other words, while economic sentiment is in fact putting the money into play in the first place, the technicals are steering the bus and currently the technicals appear to be rolling over.
  • Strategically we have our doubts. The continuing degradation of The USD and the EUR, combined with consensus expectations for softer growth levels going forward for several years, offers a compelling argument for holding liquid hard assets even without inflationary pressure on the horizon. Factor in the specter of real quantitative easing that rose from this week’s FOMC, and you have the potential for a sustained lack of confidence in the fiat currencies of the wealthy world.

If you have read our work before, you understand that price action rules in our risk process. We are not afraid to try and get in front a trend change but we are also are careful about taking losses prudently rather than holding on just to prove ourselves “right” at great expense.

As such, any short we take in gold in the near term should be viewed as tactical in nature and not as a strategic conviction. Although we concur with tactical on the “fiat” nature of gold itself as a commodity, the strategic bullish argument for yellow rocks will remain strong so long as there is the threat that the printing presses will resume.

In this instance at least, it appears that rock may in fact beat paper.


This guest post comes courtesy of Waverly Advisors >

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