No surprise gold prices recovered after this week's beat down, a recovery that will likely be further fueled by the Federal Reserve chairman’s comments on inflation.
Gold prices started their recovery in early trading, moving up $4.99 to $1,679.20 and silver is up $0.08 to $33.00. The silver/gold ratio, the ounces of silver it takes to buy an ounce of gold, stands at 50.8.
Federal Reserve Chairman Ben Bernanke told Congress last week that the Fed is willing to breach their short-term inflation target of 2 percent in the quest to lower unemployment.
By way of a reminder, the Fed’s inflation calculation does not include food and fuel prices. Price increases in those two commodities are just a bonus to the increasing cost of living and I’m still trying to figure out how the Federal Reserve expects anyone to live in the U.S. economy without driving or eating.
The cost of crude oil has risen 32 percent since the third quarter of last year and around 6 percent so far this year and the move adds to the long-term good news for gold and silver.
Meanwhile, for the rest of us, our pay is going up more slowly than prices. If you’ve felt poorer lately, you’re not imagining it as real average weekly earnings have fallen for the last 10 straight months. That puts pressure on the broader economy as companies have a hard time raising prices on already strapped consumers.
The Fed expects inflation to run at or above 2 percent for the next three years. That means you can expect your cost of living to go up 6 percent between now and 2015 on the low end. Talk about a bright future. We can look forward to companies having their profits squeezed by consumers who are losing ground financially while inflation takes a bigger bite over the next three years.
That leaves defensive investments in hard assets as your best play for the indefinite future. Expect volatility in the markets ahead, so some timing of your gold and silver trades in the near term may be prudent. Use drops like yesterday as an entry opportunity and when the speculative investors come piling in to gold and silver make small sales into the rallies.
I realize I must sound like broken record to some of you, but I’m not going to change my recommendation until the underlying story changes. The sad truth is the story of our economy is not really improving all that much.