Does Gold Topping $1000 Signal Coming Inflation?

The market is trading higher this morning, on no real news other than enthusiasm among investors to get back in the energy and materials sectors as the global economy continues to firm up.

The IMF said over the weekend that the world economy will likley begin to recover early next year, earlier than it has previously expected.

Also, commodities are roaring higher as the dollar continues to slide to its lowest levels in nearly a year. The UN made some comments about replacing the dollar as the global reserve currency, which likely exacerbated the selling.

The lower dollar in turn boosted commodities, with oil breaking back above the $70 level and gold spiking above $1000, a key area. Many people are discussing the idea that gold surging above the $1000 level is a sign of pending inflation, but there are other reasons for the rise in gold prices.

One reason is the big wedding season in India, which causes demand for gold to spike in the country that uses the highest amount of gold per capita. Also, as currencies weaken (not just the dollar) global central banks look to increase their gold holdings. Third, don't forget the demand that simply comes from investment speculators looking to profit from the trend of higher gold prices. And with the advent of gold ETFs, speculating on rising prices is now easier than ever, and increases the investment demand for the yellow metal.

If there was truly inflation at our doorstep, I think it would be showing up in higher bond yields, as well as some of the inflation datapoints that we continue to get each month in the economic releases of CPI, PPI, unit labor costs, etc.

While the energy and materials sectors are leading the action so far, healthcare stocks are actually lower on the day amid reports from the New York Times that the White House is still weighing a public option for its healthcare reform bill.

Asian markets were higher overnight; the 10-year yield is steady at 3.44%; and despite higher stock prices today, the VIX is also trading higher at 25.69. I would expect the VIX to be lower today, so this might be something to watch.

Trading comment: I have not yet taken profits in our gold etf (GLD) positions, but am close. I am also watching a highflyer name (STEC) that I am interested in adding if it continues to pullback. Otherwise my exposures in our portfolios are about the same. I am still mostly invested, although cash balances remain a bit above normal levels.

At this point, last week's pullback looks like another short affair, and the "stair-step" market that I have continually described remains in effect.

long GLD