Wednesday, November 18, 2009

BAGAKOAA November 18, 2009 Diggin for gold late at night.


November 18, 2009 Diggin for gold late at night.

I received a question early this morning from Bob H. asking about inflation Gold and the like. Thought I would share it with you.

“Hi Brian, I think Bear Stock Investors need to act like the predator. Lick their chops till the time is right, just like the animal does in nature.

Everyone is going gold nuts right now. The ETF GLD stock has gone nuts. I think Bernanke will want to have rates as low as he possible. But some time next year I think he will have no choice and start to raise rates. When Bernanke even hints at this I think DZZ the Bear Gold ETF will go nuts. Right now DZZ is the most beaten up ETF in the world probably. But I think times will change next year.

Just wondering what you think about this idea?”

I had never seen DZZ before, and never considered a contrarian to gold approach. Let’s focus on the underlying issue driving gold. It would be easy to say gold is up due to a weak dollar, but gold is up in nearly all currencies. Yes most other currencies had the dollar as a loosely rooted base, but there is a demand type issue driving gold at the moment as well as a weak dollar.

Please remember the post from November 11 about the world central banks and their foreign reserves shift to a higher balance in Gold. Again there are demand factors at play. One of my gold experts (David) might want to chime in here.

Now let’s talk about inflation. Bob’s subject line to me mentioned an “inkling of inflation”, probably referring to the slightly higher (but not surprising) increase in the CPI, Consumer Price Index. The base price for oil had gained over the period mentioned so there was an expectation of firming in the price index. When you drill down into the CPI you’ll see that it was energy costs and used vehicle pricing driving the slight bump in the index.

It was worth noting that less than an hour after the CPI rate announcement this article appeared in the WSJ today.

“NEW YORK -- If the Federal Reserve sticks to the pattern set after the last two recessions, interest rates will remain unchanged until 2012, a Federal Reserve official said Wednesday.

Assuming the recession ended this summer, Federal Reserve Bank of St. Louis President James Bullard said interest rate hikes could lie well into the future, assuming the central bank sticks to raising rates between two-and-a-half to three years after the end of a downturn, as it did for the past two recessions.”

Now, let’s take a look at Bob’s observation about GLD going Nuts. I have always found that to be a relative term. Year to date its up 38%, over 5 years its up 148%. The Dow is up 38% against last years (next week number), and fairly flat for 5 years. AAPL taking into consideration the 05 two for one split is up 279% over 5 years. So I don’ think gold is going nuts.

I am up about 27% on GLD and I have taken a bit of profit. I don’t think it is done. I think gold has another 7-11% up between now and Q 1. Then you will see the 80 dollars a barrel kicking in causing enough inflation to get the fed to think about increasing the prime rate and then you might see foreign reserves shift back to the dollar and shedding some gold. That is not to say I do not have some stops on the beast that I watch very closely. When it corrects, it will be quick and you could see a 15-20% correction in 24 hours.

Salve Lucrum


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