Be Cautious About Investing in Gold

Everything which glitters is not gold.

A rumor triggered the rise in gold prices to $1040/oz Tuesday and it was nonsense. The gossip was that Middle Eastern countries wanted to price oil (black gold) in terms of yellow gold rather than the dollar. This has been said by Hugo Chavez but never taken seriously by OPEC.

The main reason is that there is not enough gold out there to finance more than a day or two of the oil trade.

Yesterday, the greenback has bounced back from some of the low levels reached after the Australian Central Bank started raising interest rates. This may feed into lower gold prices. The price of gold has tended to move inversely to the dollar in recent years.

That is not the only reason for caution on gold. Another is that the current high price may discourage jewelry buyers as we move into the main season for buying bling, kicked off by the celebration of Divali in India, and then followed by Christmas.

Another negative is that despite being headed by a Frenchman with a natural taste for the yellow metal, the International Monetary Fund is expected to sell some of its gold hoard to help troubled countries.

But my main reason for caution about gold is that inflation is still unlikely this year and next. The idea that loose money will trigger inflation is based on past experience. I know that we all are aware of the risks of saying “it's different this time”. But we are in an unprecedented economic situation.

Long-term I still believe that inflation risks exist and that we should hold on to our gold stocks, and Exchange Traded and Closed-End Funds. But short-term there may be a reversal.

Comments

[Michael Clark:]

The anti-gold police are starting to pound the table. That is a good sign. Fear is what makes people talk about the things they are afraid of.

Oct 08 08:51 AM

[DONE_SONZ:]

NO FEAR.The loss of the gold standard created a monster.Fiat currency.History proves it.

Oct 08 09:26 AM

[kelvin8:]

How naive can you be! Gold's rise had almost nothing to do with a "rumor", you really think institutions move 100's of millions of dollars based on obscure unsubstantiated articles?
It was about the Aussies raising interest rates, which was enough to trigger a short covering rally.

Oct 08 09:27 AM

[frdm45:]

Are these naysayers getting kickbacks from the Fed?

A MUST SEE VIDEO from the author of Rich Dad Poor Dad!!!!!!

It's great, he really slags GS and the Fed.

On YouTube:

Robert Kiyosaki: Silver is the best hedge against inflation!

www.youtube.com/watch?...

Oct 08 09:50 AM

[przem23:]

Actually to be precise, the rumor was to price oil in a basket of currencies (as well as gold),.. essentially reducing USD influence.

Oct 08 09:53 AM

[JeffDB:]

That *was* an interesting clip, frdm45

On Oct 08 09:50 AM frdm45 wrote:

> Are these naysayers getting kickbacks from the Fed?

Oct 08 11:26 AM

[blacksilver:]

People have warning against gold dropping since it broke 500.dollars They said that was a bubble and there's no way it could stay at that price.

Oct 08 11:27 AM

[Asia Hand:]

I concur with Michael Clark.

The louder they pound, the harder they fall.

I believe that is a play on the lyrics from Jimmy Cliff.

Oct 08 03:27 PM

[williemo:]

You, my dear, have wisdom. Excellent observation and advice !
Some out there may have short term knowledge.........but we know what happens when misplaced knowledge is ill-timed.....disaster!
Inflation is probably coming, but the title wave of lower loan and property values is much bigger than the liquidity the Fed has let out. You better have stops on your gold or silver holdings, or start selling some now, because by early 2010, you will wish you had.

Oct 08 03:40 PM

[Carlos Lam:]

The author gets some facts incorrect:

1. The report that the OPEC nations, Japan, and China want to denominate petroleum in something other than the USD is not a "rumor" or "gossip" but a report in _The Independent_, a very credible UK paper. Moreover, the reporter--Robert Fisk--is a true pro, having won the Jacob's Award, has been named the British Press' Awards Int'l Journalist of the Year SEVEN times, and has received both the Martha Gellhorn Prize for Journalism and the Lannan Cultural Freedom Prize. In short, Mr. Fisk isn't in the business of spinning tall tales.

2. We HAVE inflation now. M1 is growing at about 16% Y/Y per John Williams at shadowstats.com. The Fed is openly monetizing the federal debt. The author may mean "rising prices" when she writes "inflation," but we have that too! Gov't taxes, fees, and tolls; food; gasoline; and insurance are all going up. Ditto for equities and commodities despite the fact that unemployment is nearly at double-digits.

Oct 08 08:47 PM

[ElTiante:]

No inflation anywhere around here. Nope.

The US dollar index dropping from 89 to 76 in 9 months has nothing to do with the trillions of US dollars printed up (the actual definition of "inflation") and shoved out the back door of the Fed.

And the rise in the Dow has nothing to do with Fed's inflation of the money supply making its way into the stock market (which has seen just a dribble of cash from private money market accounts this year).

High prices are the "result" of inflation, but none of the following smells inflation-related:
OIL
Feb 1: $35/barrel
March 16: $48/barrel
March 23: $53/barrel
May 10: $58/barrel
Sept 12: $70/barrel (100% increase/6 months)
GASOLINE
February 1: $1.75/gallon
September 12: $2.80 gallon (60% increase/6 months)
COPPER
February: about $1.80
October: nearly $3.00
GOLD
Jan 15: $800/ounce
March 23: $944/ounce
October: $1050/ounce (20+% increase/9 months)

No inflation that I can see. Nope.

Oct 09 03:42 AM

[Chancer:]

I do not see how THEY can keep claiming no inflation.

Many food producers are down sizing their packages, charging the same previous price for a smaller package of product.

Charging more for less product is a price increase.

THAT IS INFLATION!

On Oct 09 03:42 AM ElTiante wrote:

> No inflation anywhere around here. Nope.
>
> The US dollar index dropping from 89 to 76 in 9 months has nothing
> to do with the trillions of US dollars printed up (the actual definition
> of "inflation") and shoved out the back door of the Fed.
>
> And the rise in the Dow has nothing to do with Fed's inflation of
> the money supply making its way into the stock market (which has
> seen just a dribble of cash from private money market accounts this
> year).
>
> High prices are the "result" of inflation, but none of the following
> smells inflation-related:
> OIL
> Feb 1: $35/barrel
> March 16: $48/barrel
> March 23: $53/barrel
> May 10: $58/barrel
> Sept 12: $70/barrel (100% increase/6 months)
> GASOLINE
> February 1: $1.75/gallon
> September 12: $2.80 gallon (60% increase/6 months)
> COPPER
> February: about $1.80
> October: nearly $3.00
> GOLD
> Jan 15: $800/ounce
> March 23: $944/ounce
> October: $1050/ounce (20+% increase/9 months)
>
> No inflation that I can see. Nope.

Oct 09 04:56 PM

[5142152-337:]

Clueless author, period!

Oct 10 08:23 PM