Gold: Critical Test for Inflation Trade

As I write this on Friday morning, the gold price is at $934.50 and is testing the uptrend that began in October 2008. Prices are also hovering near the 23.6% Fibonacci retracement level.



For technicians this represents an important test for gold.


The Rand carry trade
South Africa has long been viewed as a commodity producer, mainly gold. The South African Rand has been thought of by FX traders as a commodity play currency, much like the AUD or CAD.

The ten-year benchmark South African bond is yielding 8.83%, considerably above the US ten-year at 3.83%, for a spread of 500 bps. Just for kicks, I looked at the cumulative P&L of this carry trade. As the chart below shows, this trade is also approaching a technical overhead resistance zone.



Which way any of these break, I have no idea. But it’s important to monitor these charts as they indicate a critical test for inflationary expectations.

Comments

[Larry House:]

Thanks. Gold isn't the only measure of inflation, and I am not sure it is the most reliable. I wish I could have more trust in the precious metals markets.

Jun 19 11:49 AM

[Donald Ingram:]

We are now in the doldrums as far as inflation/deflation is concerned.
We get a little of both and they tend to cancel each other out. This tug of war between the two forces will carry on in the foreseeable future, until one or the other wins out. Most likely a ramp up in inflation. Depends on the U.S. dollar now and where it's value goes.

Jun 19 12:44 PM

[Graham and ...:]

Gold is in a "normal" uptrend, pricing in "normal" inflation. Not currently "testing," or saying much of anything.

Jun 19 02:11 PM

[doubleguns:]

As it is most summers. Lets hope it stays there and there is no cause for concern. Fall and winter is the best time for gold anyway. Summer is usually a buying oportunity. Suggest you take it.

Jun 19 02:25 PM

[djj420:]

Not a major concern where gold is relative to trendlines unless you're actively trading. If you're buying your first position this near the top of the recent range, average in slowly. Don't buy it at all if you can't handle volatility.

Jun 19 03:21 PM

[DmytrenkoArtem:]

i am agree on all fundamentals of gold.. i am just afraid that we have someone near to gold mania

Jun 19 04:04 PM

[Market Sniper:]

Death of the dollar is coming. Got gold? Got silver? Soon, this discussion will become irrelvent as NO amount of fiat will buy you one small oz of gold. History is repleat with examples. This is an old well trodden road we are on. It may eventually come down to those without gold will not eat. Hope to be wrong about this but a prudent man hedges his downside risks.

Jun 19 08:45 PM

[Michael Corley:]

so I see you subscribe to the fiat money school of thought? Gold is way more volatile than dollars and all that it takes is a huge influx into the market to mess things up. In a recession it is likely to come from a number of places. I wouldn't be too swift to call the dollar fiat money compared to gold or to advise people to put their money in it. It's partly hype.


On Jun 19 08:45 PM Market Sniper wrote:

> Death of the dollar is coming. Got gold? Got silver? Soon, this discussion
> will become irrelvent as NO amount of fiat will buy you one small
> oz of gold. History is repleat with examples. This is an old well
> trodden road we are on. It may eventually come down to those without
> gold will not eat. Hope to be wrong about this but a prudent man
> hedges his downside risks.

Jun 20 08:55 AM

[Hot Richard:]

Calm before the storm, captain. A bracing breath before the plunge.

Position yourself well by getting rid of every single US$ you can. Oil, commodity indexes (outside the US), metals...even gold-backed currencies.

You'll have some more time, but the crash will happen fast.

Jun 20 12:32 PM

[EX-AD-MAN:]

If it comes to Sniper's doomsday fiat-crash scenario are we not all royally screwed, regardless? Gold coins are worthless if you haven't cinder blocks to surround them and M-16s in the watchtower - seriously. If Fiat money goes, life as we know it follows suit. You would have mobs of people lurching about the countryside, literally foraging. Perhaps I am missing something, but without faith-backed money the system stops functioning and what you "own" - if not a weapon - becomes meaningless.

And I have to ask: History is replete with examples of what? Media saturation? Up-to-the-minute news, summoned to your palm, 24-7? A global financial system bound by transocean fiber optic cables? The world may have changed more these past 20 years than in the preceding 1000. Citing history is obviously a smart thing; for example, it seems obvious by now that you can't drop ship democracy into semi-literate 3rd world banana republics with gift-bearing storm troopers. On the other hand, to cite precedence as a warning that our wired, fiat global system could suddenly go Weimar Republic or Zimbabwe on us seems a bit disconnected.

Jun 20 02:11 PM

[Moon Kil Woong:]

I do not believe gold and silver are the best test for inflation. Although people see it as an inflation hedge there is such a stockpile of gold and silver that never is put to productive use and held by central banks that the price can be altered by 1 or 2 huge players with large stockpiles.

It is much easier to gauge inflation off of commodities with less stockpiles in which undergoes constant consumption. These are more food, oil, and other conumable commodities. China's recent stockpiling of copper and steel seems to be their attempt to make thse productive metals a stockpile of value as well. That would bne a shame because they are needed for productive uses more than some "stockpile of intrinsic value" to keep locked up for eternity.

Jun 20 09:27 PM

[MarvinMBA:]

I haven't been publishing much because I'm working 3 jobs so I can buy gold/

Jun 21 10:47 AM

[Market Sniper:]

I understand that, ex-ad-man. It is one VERY possible scenario. I tend to think in probabilities. How else is one to deal with an unknowable future? When Nixon de-pegged from gold (removing the very last vestage of a control mechanism on craven, idiotic and imbacilic fiscal and monetary policy) with an historical perspective, you could see what was to come as if it were history already. Just time frames are always a bit fuzzy. I did not believe I would live to see the final result. Figured my children would. However, on THAT I was wrong. Future probabilities are distributed on a bell curve with the highest probabilities in the center of the bell. The outlier (least probable outcomes) are at the tails of that bell curve. We have witness, just in the last 5 year, extremely improbable outcomes have come to pass as we move further and further to the right end of that bell curve. NOW the extreme outliers (least likely outcomes) are too horrendous to contemplate. We tend to think in a linear fashion. That being that what is happening now continues into the future. Just because a fiat money system today still holds sway does NOT mean it continues indefinately into the future. The Romans clipped coins, thereby debasing their value. Now we have dompletely divorced the "money" from anything other than confidence. How confident are YOU of the good intentions of craven politicians and private central bankers? Those are the guys that control "money". Ignore the lessons of history at your own risk.


On Jun 20 02:11 PM EX-AD-MAN wrote:

> If it comes to Sniper's doomsday fiat-crash scenario are we not all
> royally screwed, regardless? Gold coins are worthless if you haven't
> cinder blocks to surround them and M-16s in the watchtower - seriously.
> If Fiat money goes, life as we know it follows suit. You would have
> mobs of people lurching about the countryside, literally foraging.
> Perhaps I am missing something, but without faith-backed money the
> system stops functioning and what you "own" - if not a weapon - becomes
> meaningless.
>
> And I have to ask: History is replete with examples of what? Media
> saturation? Up-to-the-minute news, summoned to your palm, 24-7? A
> global financial system bound by transocean fiber optic cables? The
> world may have changed more these past 20 years than in the preceding
> 1000. Citing history is obviously a smart thing; for example, it
> seems obvious by now that you can't drop ship democracy into semi-literate
> 3rd world banana republics with gift-bearing storm troopers. On the
> other hand, to cite precedence as a warning that our wired, fiat
> global system could suddenly go Weimar Republic or Zimbabwe on us
> seems a bit disconnected.

Jun 21 11:20 AM

[James Long:]

I have always thought it was unique that we trade little bits of our lives for this stuff we call money. My mother worked in a bank, and she always said money was just a means of exchange. So our faith is really the key to the whole value assessment of "money". There will always be something we will exchange for the goods & services we need, let us hope we can all keep the faith. Also a little hard currency & something to protect it with might not be a bad idea.

Jun 23 04:52 AM

[Mayer Amsch...:]

The dollar IS fiat money. That's not an insult, it's a factual term.
One thing I'm curious about is when the IMF or governments will actually DO anything with their gold. The US has the largest gold reserves of any country in the world; now that we're off the gold standard, what the hell are we going to do with the stuff, anyway? Devalue our money and use the gold to pay off our debts? I mean, if this isn't a big enough emergency to make use of it, what is?


On Jun 20 08:55 AM Michael Corley wrote:

> so I see you subscribe to the fiat money school of thought? Gold
> is way more volatile than dollars and all that it takes is a huge
> influx into the market to mess things up. In a recession it is likely
> to come from a number of places. I wouldn't be too swift to call
> the dollar fiat money compared to gold or to advise people to put
> their money in it. It's partly hype.

Jun 24 10:27 PM

[Cam Hui:]

If the US went to a gold standard the target price would be somewhere between 5K and 10K/oz.

But be careful about what you wish for. My full comments here: humblestudentofthemark...

Jun 27 08:21 PM