Monday, May 2, 2011

Inflation & Economic Recovery: Is It Time to Sell Gold and Silver?

I wrote in my recent article  about the confusion of core inflation and headline inflation which exists in many minds.  David Andolfatto, who is a Canadian economist who works for the St. Louis Federal Reserve, has written an explanatory piece on how the measurement of inflation is meant to have practical policy meaning and, if the purpose of core inflation is to approximate a trend, then why not calculate an inflation trend.  He shows how a trend line of inflation would look compared to headline and core:

At the same time, as my article Bernanke's press briefing indicated, the Fed appears to be overly concerned with inflation expectations as opposed to actual inflation.  Tom Duy believes the Fed will end QE2 and begin tightening to fight an inflation that does not appear to exist in reality given poor retail final sales, a very depressing continuing output gap in a "recovery", and slow GDP growth reflective of stagnating employment.  Tom Duy compares the 1982 recession recovery retail final sales chart with the current recovery retail final sales current figures chart showing the current recovery is pitiful in comparison.  He also shows in graph form that inflation is well contained.

The Australian economist Bill Mitchell continues his criticism of American economic policy with asinine public debate on the need to raise the debt ceiling, citing even Warren Buffet as stating that is the failure to raise the debt limit would be the most "asinine act" and that there should not be a debt limit in the first place.  Mitchell then looks at the slow U.S. GDP growth, continuing high unemployment, and continuing low inflation and finds the U. S. government's failure to provide sufficient economic stimulus in the form of fiscal spending to increase employment economically inappropriate and unconscionable.

David Andolfatto wrote an article after the Fed press briefing about inflation , money supply , and gold prices and dismisses the argument of currency substitution and transitory commodity prices.  In the process he shows a 20 year chart of money supply compared to the price of gold, which finds, as anyone familiar with historical inflation and gold prices already knows, that gold prices rise and fall and does not keep pace with inflation.

Given the Fed policy of a weak dollar, based on the weekly charts, the price of gold may not be going down immediately while it continues to test resistance levels, but if you have a basis of, say, $400 an ounce in gold and it is now over $1550, why would you not be locking in profits and continuing your original investment amount if you think it will still continue to rise and not fall?  Hyperinflation is not going to happen.  If the economy tanks and the dollar is worth little, how many bullets will it take to appropriate your gold?  On the other hand silver does appear to be peaking or approaching a peak with a significantly growing short position.  In just one weekend since the weekly charts above, silver went down 12% (the chart is ugly) with a low of $42.19 closing at $44.93 on Sunday (5/1/2011) trading and the COMEX may be facing a major default in a TBTF as there is supposition that J. P. Morgan, as the money maker for silver, was on the wrong end of the trade.  If you have an over 200% profit in silver, as I do in the personal (designed for use by an individual investor on their own) "hedge" fund portfolio model I have designed, or any 20% or better profit, why not lock in the profit while you have it?  It may not yet be the time to sell gold, but, in my personal opinion, it sure looks like a decent, prudent time to sell silver before the rush.  If you are in commodity ETFs, do not panic, but do not be complacent.  Make sure you have your stop loss or stop loss limit orders in place to limit losses and protect gains.  If you are in bullion or coins, you are hopefully near a reputable dealer.

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