Gold Takes a Break

Posted: Aug 29, 2012 12:01 AM

Gold appears to be hitting some resistance trying to break above $1,670, with prices lower in overnight trading. 

Trading for gold started out down $4.82 to $1,660.80 and silver was off just a penny to $30.76, lowering the silver/gold ratio to 53.9. 

Hopefully you took my advice earlier this month and added some silver to your collection before the recent run up.  With the volatility in silver prices it’s really not a good idea to chase rallies.  If we do see silver dip below $28, then go ahead and buy some more. 

The investment world seems to be taking a wait and see approach to the Fed’s comments on Friday.  Really, no matter what Chairman Bernanke says, it’s unlikely to change the underlying fundamentals of the U.S. economy, though it could introduce some short-term volatility.  Even if the Fed says no to additional stimulus, which seems to be the consensus right now, there’s still a massive amount of liquidity in the system from previous rounds of QE or Quantitative Easing, a fancy way of saying printing money. 

All that money in the system raises the possibility of inflation.  Bizarrely, the Fed has largely been spared the usual inflationary consequences, at least so far, but that can’t last.  Retail businesses have been absorbing the price increases at the wholesale level, but I’m seeing more and more indicators that businesses will have to start passing those price increases on to consumers. 

The drought in the midwest is going to have a gut-wrenching effect on food prices next year, which could just be the inflationary trigger that sets off the whole powder keg. 

During inflationary times it’s good to be holding hard assets like gold and real estate.  Of those two, only gold can be held at zero cost to the owner.  With real estate you’re taxed according to the value of the land.  In effect you pay rent on the house and property you own to the government. 

So, in inflationary times why wouldn’t you want to convert all your wealth to gold and silver?  For the same reason you don’t put all your investment money in one stock.  Central banks, which are now holding a lot of gold, could go on a coordinated selling spree and the price of gold would plummet overnight.  I don’t think they’re going to do that, but it’s crazy to take that risk.

Be wise and stay diversified. 

Chris Poindexter, Senior Writer, National Gold Group, Inc