When someone talks about gold, the first thing that comes to mind, after a picture of a heavy shinny thing, is the word "inflation". The ordinary average investor/economist looks to gold as a barometer of inflation because price movements of gold in the past have been a reasonably accurate indicator of the level of inflation.
Given the degree to which the price movements of gold are analyzed/scrutinized we believe that this is a rather futile exercise. Financial markets are a strange phenomenon where often the harder we look for something (having observed it in the past) the less likely we are to find it occurring in the future. We believe that this time around the gold price will be a lagging or "coincidental" indicator for inflation.
Furthermore, gold also suffers from the fact that it is relatively easy to manipulate. Compared to paper currencies it is quite illiquid and easy to store. So if you had the backing of a government balance sheet you could manipulate its price (we are not saying that it is being manipulated we are merely saying that it could be).
Anyway, for those of you who are looking for a leading indicator of inflation we suggest that you look no further than the behavior of the industrial metals group. From a relative perspective it is considerably difficult to manipulate industrial metals individually and even more so as a group (copper, aluminum, nickel, lead and tin).
To get straight to the point, if industrial metals are rising on a rolling 100 day basis, it is highly likely that it is because of a change in fundamentals (albeit perceived). Specifically it is due to demand outstripping supply and indicates a rise in world industrial activity and inflationary conditions. Yes it is that simple, and it is the simple things in investing that make all the difference.
Why not the energy group or the food group? Yes the energy group certainly does have merits as an indicator of inflation but we find that it is often subject to price movements due to political "activity" rather than pure economic fundamentals. Agriculturals are not so subject to political actions but rather are very subject to climatic conditions which at the best of times have nothing to do with underlying economic fundamentals.
Anyway, getting straight to the point - industrial/base metal prices are rising and doing so in unison and in a rather linear fashion. This suggests that the move is very real and there is considerable more upside. These strong trends suggest that world growth is picking up rapidly and we are moving into an inflationary environment and one in which is likely to surprise many. Accordingly it is only a matter of time before gold breaks above $1000.
How far will the advance in industrial metals go? The action of the market suggests that the up-trend is just getting into gear and that the upside is likely to be "considerably material". If you are looking for the next "TMT" bubble to ride, it is probably staring you straight in the face - believe it or not!