Higher Gold Prices Not Necessarily Indicating Inflation

Sorry for no posts yesterday. I was in San Diego attending the annual Schwab conference. I also had a chance to stop off and do some surfing at San Onofre on the drive back. What a great spot.

Anyway, the markets are higher again this morning. Lately, it has felt that whenever the markets opened weaker in the morning, they regained their footing and finished in positive territory by the close.

That is textbook bull market action, and could be indicating that money continues to trickle in off the sidelines. Of course, it could also be exacerbated by traders that are trying to short things early on, but when the shorts can't gain any traction, they cover by the end of the day.

This morning's economic releases were essentially in-line. The August CPI rose +0.4% for the month, vs. +0.3% consensus. Also, capacity utilization rose slightly in August to 69.6% from 69.0% in July. At this low level of resource utilization, we are still a long way off from having to worry about inflation. There is simply too much slack in the economy right now.

The dollar is lower again today, helping push gold prices back north of $1000. While some think the rise in gold is a forward indicator of inflation, I think it is more a currency phenomenon. First off, as countries try to push their currencies lower to make their good more attractive on the global market, gold benefits.

Also, as central banks like China diversify their holdings, they are likely steady buyers of gold right now. But if inflation were truly a coming problem, I would expect to see bond yields moving higher also. Currently, bond yields are moving lower, indicating the bond market remains equally concerned that deflation is still just as much of a risk.

Asian markets were strong overnight; the 10-year yield is steady at 3.44%; and the VIX is creeping lower, falling to 23.22. Economically sensitive groups such as financials and energy are leading the action so far, while defensive groups like consumer staples and utilities are lagging.

Trading comment: It has already been a busy morning of trading here. I have been trimming our precious metals and materials holdings as they have had big runs. I took partial profits on our gold etf, sold a silver position, and also sold a steel stock. I like to take profits after big runs, and then look to possibly reload these trades on pullbacks.

This continues to be a difficult market to trade for all but the uber-aggressive. Most attempts to hedge or raise cash have proved overly conservative. While I continue to take profits on things that have run, the key so far is to get back in on pullbacks quickly, as dips during this long run have rarely lasted more than a few days.

long GLD, VXX