jack

Gold To Break Away From Equities

Gold is like any other commodity. It has a certain intrinsic value based on supply and demand, which is independent of currency values. Thus it is a good hedge against inflation. But then, so are all commodities.

The thing to remember is that commodities also rise in value as interest rates increase, due to the interest rate component of futures contracts. Because a common method of combating inflation is to raise rates, commodities of all varieties can have periods of outperformance, as prices are pushed up both by the inflation itself, and by the interest rate hikes used to combat it. Gold is no exception, as leveraged positions and options are also rate dependent.

Good businesses, like commodities, have intrinsic value and thus serve as reasonable inflation hedges themselves. However, stock prices tend to go down with rate increases, rather than up. In light of the Fed's decision to hold rates steady recently, it's no great surprise that gold and stocks have moved in parallel. If the fed chooses to raise rates (as I agree it should), the combination of the herd waking up and saying "uh oh, inflation" with the rates themselves should cause gold to pass stocks by <i>briefly</i... at least until current contracts priced for lower rates expire.

I like gold as a short term play right now, but that's it. Timber is a smarter long-term move. It has the same inflation-flighting benefits of gold, with the added benefit of income production. Gold doesn't grow on trees. Timber does.

Drop by Quite Contrarian some time. I'll be writing a number of articles about inflation over the next few weeks.