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Gold Stocks and Inflation: Weekly Wrap-Up

It wasn’t a big surprise to see the Fed leave rates unchanged and the dollar weaken as a result. What was surprising was that gold turned down on the news. The reason given was that the Fed’s decision signals that inflation isn’t a significant problem right now and gold is traditionally viewed as a hedge to inflation. Well, inflation is a funny thing to get your head around. The Federal Reserve lowered Total Fed Credit by $5.6 billion and the Treasury engineered a $2.3 billion drop in actual cash from the economy last week. Goodbye inflation, right?

Inflation.gifMaybe not so fast. Let’s take a look at the Core CPI, which is so often quoted in the media. For the month of July, it was up 2.4% versus the same month last year. Not so bad, except for the government conveniently leaves out food and energy costs from this statistic. You can make charts and numbers give just about any result that you want, with a little ummm…. massaging. I should know, I’ve done exactly that for years in the corporate world. But a more accurate picture of inflation is given using the overall Consumer Price Index. For July, it jumped 4.1 percent compared with the same month last year. Now, the problem with such a number is that you have to subtract this number from GDP growth to get Real Growth for the economy. And if we use a number higher than 4%, suddenly we have negative real growth. Which in not-so-pleasant terms means: recession. We can’t go throwing that term around with the November elections so close. Combined with a 12% annual increase in food prices and a 7.2% annual fall in the purchasing power of the dollar, it is a fool’s move to look at the Fed leaving rates unchanged and assume inflation is not a problem.

Perhaps the gold market sniffed this absurdity because after the initial decline with the Fed news, it has since tacked on more than $13 and is sitting around $590. Increased demand from overseas and a weaker dollar versus the Euro are certainly main contributors to this move. But with 135 metric tonnes that could still be dumped on the market under the Washington Accord quota, prices are likely to remain rangebound waiting for a signal in either direction.

The uncertainty in the precious metals market is evident in the wide range of opinion from industry experts. Some still see gold at over $800 before the end of the year, others are cautioning a drop to the $400s. At Gold Stock Bull, we remain invested in our core positions and are looking to add on further correction or on any sustained upside breakout. As always, we will keep you abreast of our sentiment as it changes. For now, let’s wrap up the week by summarizing the views of the gold investment community:

Dr. Clive Roffey asks:

Have you noticed that the gold price remains stable in Far East and European trading but the moment the US market opens they hit it. This smacks of hedge fund games that are triggering computer generated stop loss levels. It certainly does not reflect true market behaviour.

Many analysts are detailing that the gold market is over and that a new bear downside to around $400 is likely. If this were a real bear trend then all markets would be negative on the gold price, not just the US traders. Secondly if this is a new bear trend then why are the real marginals like DRD and Afgold still holding well above their lows while the less leveraged stocks such as Goldfields are being hammered.

As far as I am concerned the bull trend on both bullion and the shares remains intact. I do not believe that this is the start of a new bear market but is rather the final C wave sell off of an old correction that has been in progress virtually the whole of this year.

Jack Chan of Simply Profits cautions:

A major correction is due and could drop prices back to between $430 and $485. Seems harsh doesn’t it? Then again, gold was at $150 higher just four months ago… We cannot see it on a monthly chart, but the “Katrina gap” is at $430 and remains unfilled.

Howard Ruff of The Ruff Times advises:

The worst financial decision you could make in 2006 is to ignore gold and silver. This one mistake will cost you more than all the dumb financial decisions you can make put together. Gold and silver are now early in a historic bull market that will dwarf the 500-1700% profits we made in the 70’s.

Gold will hit at least $2,172, and $100 silver is inevitable. Is it unreasonable to expect such returns? Those are not unprecedented numbers. In 1980, gold hit $850 and silver hit $50. If you adjust those numbers for inflation since then, the metals will not make new highs until $2,172 (gold) and $125 (silver). We sold gold at $750 and $35 respectively in 1980, just two weeks before the peak. Not the exact top, but close is good enough. We started at gold $120 and silver $2. The forces that took gold and silver into the stratosphere in the 70s are back in spades, only more so. Several times more so!

Dr. Marc Faber reminds us:

In order to succeed in this kind of market you need to recognize the reality of a fixed gold market and buy and hold until this whole artificial construction comes tumbling down. Then gold and silver prices will soar and the holders will make a huge profit.

So buy a little gold for your portfolio, or quite a lot if you have the cash available. For gold will protect your finances against inflation, deflation, devaluation, stock market crashes and almost any other negative economic scenario.

Richard Russel of Dow Theory Letters think the correction is growing tired:

Gold has been moving basically sideways for five days. The stochastics look as though they are ready to turn up. RSI is favorable. I checked the histograms on a few leading gold shares (ABX, GG, NEM) and although still negative, they are advancing towards zero, which is a plus. All this suggests that the correction in gold and gold shares is growing “tired.”

Chris Laird of Prudent Squirrel is still bearish:

I am not saying that gold is going to drop $100 from where it is now, but I do feel confident to predict that gold will drop to between 500 and 550 by Dec 31, 2006. I hate to say this, but we could even get to below $500.

Reason overall for this? -A cooling world economy, dropping demand for commodities, and oil, and spill off of speculative froth in commodities and gold that has built up in the last several years in a very different world economic environment.

Douglas V. Gnazzo of Honest Money Reprot thinks it is wise to accumulate at these prices:

Gold has been and still is within a primary bull market. The HUI has seen a 900% rise since the bull began 5-6 years ago. The recent correction of 96 points or 24% sounds scary if only taken at face value – isolated out of context, instead of compared to the entire picture. It must be remembered that since the move off its 2005 low, the HUI gained 228 points or 137%. The correction of 96 points (24%) is not even at the standard Fibonacci retracement levels of .318 or 50%. Bull markets experience corrections of 1/3 to 1/2 and up to 2/3’s on a regular basis. Those who are singing the death knell of the golden bull are a bit premature in our opinion.

Leave a comment with your opinions on the gold market and the thoughts above. Now get away from the computer and enjoy the weekend! Peace and prosperity to you all.

By | 2017-03-23T14:06:43+00:00 September 22nd, 2006|Gold & Silver Commentary|

About the Author:

Jason is the founder of He previously worked in data analytics for the world's largest research firm, consulting to Fortune 500 companies globally. Jason eventually leveraged those skills to trade successfully full-time and after helping friends and family optimize their investments, he launched Gold Stock Bull and The GSB Contrarian Report newsletter. Jason is a cycles investor with a contrarian eye for identifying undervalued assets. He has built an expertise in both the precious metals and cryptocurrency markets. Jason believes in honest money, limited government, decentralization of power and enjoys studying alternative economic models.