1/6/2012 11:57 AM ET|
Ahead: Inflation and a gold rally
Markets enter 2012 with Europe's finances and inflation here at home still the big questions. Plus: There's reason to believe the recent gold correction may be waning.
Though 2011 was a poor (if not horrible) year for most investors in most markets, 2012 started off fairly strong for European and U.S. stocks early in the week. (Europe's bond markets, though, were largely unchanged Monday and Tuesday, after a decent amount of motion to close out 2011; they weakened as the week wore on.)
Meanwhile, the faltering euro did not precipitate enormous weakness in other currencies, though there was a bit of that. (The logic was that if the euro is weak then the dollar is strong, in which case you're supposed to sell everything except dollars. At least that is the current conventional wisdom, even though it doesn't make much sense.)
Out with the old, up with the new
I'm sure precious-metals bulls were extraordinarily frustrated late in 2011, as gold and silver were sold regardless of the news. Certainly markets can be maddening as well as unprofitable at times, especially at the end of the year, when forced selling (or, in some years, herd-driven buying) causes the markets to ignore favorable news. Selling sometimes feeds on itself.
Of course, when a trend is as powerful as the recent decline in gold was, I'm sure there were computerized trading programs jumping on the bandwagon as well, and betting on lower prices by getting short.
In any event, as the year ended, the stage was set for a potent rally in the metals, and that was what I think we saw starting on Tuesday. The questions now are whether the last week of December was the low for this entire decline, and whether we get some sort of test of those prices (as well as what such a test might look like).
Since so many people trade gold on a technical basis, the determining factor for what the next pullback looks like may be dictated by whether it can get over its 200-day moving average, at around $1,625 per ounce. I don't have a strong opinion at this point -- it would be almost impossible to have one yet. But it is entirely conceivable, given the forced liquidation and computer activity, that the lows for this correction have been seen.
No home-field advantage
Turning to the world at large, while the market "wrote the news" in the last couple of weeks (and the last couple of months) of the year, and the Standard & Poor's 500 Index ($INX)rallied, folks seemed to get quite giddy over the possibility of potential strength in the U.S. economy. I think those expectations are misplaced. I don't think our economy is all that strong. It may not be the disaster that Europe's is, but I expect those looking for economic strength here will be disappointed.
Be that as it may, the U.S. is not the major focus of the markets at the moment anyway. That honor goes to the continuing saga of Europe's financial situation. On that score, as folks have had time to think about what the European Central Bank is up to and to look at its balance sheet, it is clear that the ECB has embarked on a money-printing mission, even though it refuses to call its actions that. (Basically, "long-term refinancing operation" is European for "quantitative easing.")
What we don't know yet is how successful the effort may be, if the worst has been seen in the European crisis, or if it is (more likely) about to deteriorate immediately.
That's why they call it the bull's eye
On Thursday, James Bullard, the president and CEO of the Federal Reserve Bank of St. Louis, said on Bloomberg radio that the Fed was "very close" to its inflation target, and that the Fed could officially adopt an inflation target in 2012.
Now I ask you, if the Fed picks an inflation rate to target, knowing the government is doing the calculating and what a complete joke the Consumer Price Index is at capturing the true cost of living, is there any doubt how this experiment is going to end? Do people really think that while the Fed has a printing press, the inflation rate has any chance of having a minus sign in front of it (i.e., we would see deflation)?
As I have said many times, central banks the world over mean to print however much money it takes to avoid anything remotely approaching a declining cost of living, with only the Europeans being unwilling to stand up and say that is exactly what their goal is. Thus, the long-term outcome is not in doubt, although the short-term twists and turns are, as always.
So for Europe, the saga continues. Will the eurozone crack up before the European Central Bank panics, or will the ECB panic first (even more than it already has)? We will just have to see, but in the end, all roads lead to money printing, debased currencies and inflation until the printing press is taken away.
At the time of publication, Bill Fleckenstein owned gold.
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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rgh - It is s little dicey right now, but right after 911 my crystal ball told me to start buying gold. And now, I still see plenty of Cash for Gold stores so these guys are still buying. I doubt we have hit a top yet. At some point there will be many greater fools all buying at the top out of panic.
There are so many theories but I like mine: In 1979 when Gold hit $900 an ounce a loaf of bread cost 49 cents. And now a loaf of Wonder Bread or Grandpa Strohemans cost $1.99 on sale. Bread now costs 4 times as much as then when Gold peaked, so playing loose and fast with numbers like any politician might, I think Gold can hit $3,600 and when it does if you want to buy some, I'll start selling mine, although I am keeping my guns.
I get a few news letters and I see predictions of $2,200 per ounce by year end and further out out when current administration on the next bunch completely destroys the value of the dollar, I would bet Gold could hit $5,000 per ounce. When it does, I probably won't have any Gold left.... all the greater fools will have it all.
I noticed that nobody is mentioning Silver as a viable investment. Unlike Gold it is used in the electronics we have all come to see as necessary. What are you thoughts on investing in Silver at this time? Commodities are a good bet at this point. But the commodities fund my 401(k) fund offers has Fanny, Freddie and some banks as the main players in the fund. I was told the reason is that they buy futures in commodities so I'm thinking that is not a good fund to invest in. They are now offering GLD stock which the real gold is held in London. Our other choices just plain suck. I'm considering taking a loan on my half of my 401(k) and buying Silver, food, and ammo. Even if I couldn't pay back the loan I think I would still be ahead with the greedy managers having control of my hard earned 401(k) funds. Thoughts?
At least Fleck isn't sounding too much like a used gold car salesman this week.
Mr. Laus' comments below seem quite prophetic and bear considerable pondering. If true, the question turns to where do we go from here? We meaning the American people as a whole...all 99.9%. (only a small number of mega rich really controls things). Does the rank and file citizen acquiesce and continue supporting the "great plan" to outsource the fabric of our economic and cultural souls by standing idle? I think not!
The American Public has graduated from wising up to mobilizing resources in the fight against the WS/D.C. demigod society that brought to the forefront the ingenious concept of welfare for the rich. Keep fighting America!
Wow! The whiners about global competition are out in force today. Trying to stop money and production flowing from high cost areas to low cost areas is like trying to plug millions of holes in a dike. We as Americans simply need to deal with the global trade situation and try to make our country more favorable versus the competition (and it is not all about labor cost).
Fleckenstein is right as usual. Inflation is occuring now and it will increase in the future. We simply don't realize it because the government is inflation's referee and scorekeeper. Gold will continue to rise in the long run until both debt and monetary policy is under control (good luck with that). If we re-elect Obama, buy gold and hunker down for long term economic stagnation.
Fool’s Gold rally. Apparently no one remembers the Gold rally leading up to 1980. That marked Gold’s high water mark of ~800 an ounce. From 1980 to 2000 Gold declined as both the Dow and S&P climbed. Only during the lost decade did the stock market stay flat allowing for commodities, including Gold, to climb. When S&P downgraded the U.S. credit from AAA to its current rating, the world didn’t flee U.S Treasuries. On the contrary, the world bought U.S. Treasuries dropping the 10 year and 30 year yields to historic low yields. With the decline of the Euro currency, the U.S. Dollar currency, the world’s reserve currency, continues to appreciate. Since Greece and other Euro countries can’t print Euros, they will have to sell assets… especially Gold. As with any demand/supply commodity, a wise investor would wait for Gold to revert to the mean and then decide whether to play this silly game. Gold is a fear holding. Unless you think that you can “time the market” in a Gold play, you do so at your investing peril. As the footnote reads, “Past Performance Does Not Guaranty Future Performance”.
Willowin said: "Unlike Gold it [silver] is used in the electronics we have all come to see as necessary."
So is gold.
Red, it's obvious that you don't have even a basic grasp of what real money is or the effects of inflation on the purchasing power of the dollar. I will answer my question posed earlier to you.
The dollar has fallen 65% in value between 1980 and 2011. So as you can see silver kept ahead of inflation acting as a hedge which is what I stated. Gold and silver are real money having been so for over 3000 years. You can't print more of it like fiat currency and physical metal has no counterparty risks. All fiat currency (including the US dollar) return to their intrinsic value which is zero.
Remember a few months ago when the hypesters were all about gold hitting $3K/oz. I said No way Jose and threw out a few common sense reasons why it wouldn't and shouldn't. That is if we wanted to have any semblance of civilization as we know it! This feels a little bit like when I was trying to tell everybody during the housing bubble to watch out. Did they listen then...??????!!!!!!
This is a different scenario with different variables and triggers. But the same concept remains where greed and irrational thinking skews the natural order of the economy. The market should actually be much more predictable than it is. But you gotta keep the crooks and gamblers in their cages. Good luck with that!
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[BRIEFING.COM] The stock market ended the Thursday session on an upbeat note with blue chips showing relative strength for the second consecutive day. The Dow Jones Industrial Average (+0.4%) and S&P 500 (+0.3%) settled ahead of the Russell 2000 (+0.2%) and the Nasdaq Composite (+0.1%). It is worth mentioning the benchmark index posted its fourth consecutive gain, registering a new record closing high at 1992.38.
Equity indices climbed out of the gate thanks to early strength among ... More
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