Inflation equals Gold/Foreign currency buying time, agree or not?
Since the U.S. dollars is dropping in paper value, people tend to move into Gold/Foreign currency to protect their asset from losing face value.
If so, why is Gold dropping in the past month from $64 to about $57. Does it mean people think Inflation is long gone and it’s time to jump right back to the stock/equity market?
I think the market has overreacted to Ben’s pause of the rate hike. Though I believe the next Fed meeting will continue to pause interest rate(or even drop in rate, possibly), I don’t think inflation is under control. Fed stopped the rate hike due to the potential meltdown of U.S. economy triggered by the housing bubble.
I suggest you take a look at the gold chart. Gold went from around $420 in 2005Q3 to nearly $730 by May 2006 with little correction. A correction is thus not unexpected and is considered healthy.
Re: inflation. Take a look at CPI numbers and compare them to gold prices in the 1970s’ gold bull market (bottom chart on http://www.zealllc.com/2006/rgold2.htm). A cyclical bear within a secular bull was seen in 1975 thru 1976, corresponding to a period of time when inflation went down.
If you believe that inflation is already under control, then there are strong arguments to exit the market. But if you believe it’s just taking a breather, then be prepare to jump back into the market.
The following article proves it right. Central banks are selling huge abmount of their gold deposit to keep the gold price in check and keep the dollar up.
Quote: “…Elsewhere in precious metals, the European Central Bank provided confirmation that it had indeed been a heavy seller last week, with sales of gold and receivables totaling 499 million euros, or approximately 34 tons. The institution liquidated about 7.5 tons in the previous period….” (Page 2)
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