Most of us have been waiting for higher inflation to erupt on the scene for some time. Government statisticians have been able to avoid the reality of market place. How many million words have been written on these web sites on nonsense of core inflation? Simplistic nature of that measure, which ignores developments in prices for oil and Agri-Food, is about to come back to haunt those policy makers that have hidden behind it. As this week's graph portrays, luxury of lower prices for goods from China's factories has faded. Higher prices for oil, Agri-Foods, and labor are now being passed onto the world by Chinese merchants. For example, price of cotton, important for clothing, has risen 40% on year ago. Higher demand and competition for land and inputs by other Agri-Food commodities have forced prices up. Statisticians will not be able to spin out of their measures these rising prices.
As these higher prices flow through core rate of inflation, the views of Gold investors will be validated. Inflation is indeed moving higher, when measured by the market place rather than by governments. However, as higher inflation becomes reality pressure will build on Federal Reserve, and other central banks, to cease lowering interest rates. Expectations have been shifting to belief that Federal Reserve might need to begin reversing interest rate cuts. In the parlance of Federal Reserve hugging economists, reversing rate cuts is different than raising rates. This shift may add support to U.S. dollar, weakening Gold prices in short-term. Only in short-term is Gold at risk due to this possible policy change, as long-term positive outlook remains in place. Other short-term factor to remember is that oil price is perhaps $40-50 above equilibrium. Investors should not be chasing Gold due to paper oil mania. Any price weakness in Gold's price brought on by these factors should be used by investors to add to holdings.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS, publisher of The Value View Gold Report, monthly, and Trading Thoughts, weekly. To receive these reports, go to http://home.att.net/~nwschmidt/Order_Gold_EMonthlyTT.html.
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