Friday, December 26, 2008

Another reason to be bullish on gold

First, the Fed has dropped short-term interest rates down to 0%. Then, the Treasury is injecting up to $7.4 trillion in additional capital, literally out of thin air, to support ailing (and failing) industries.

Capacity issues are creeping in, as farmers lose crops due to drought, mines dry up, and exploration for new resources are stalled due to the financial crisis. All these factors point to inflation. However, fears of deflation rule the day.

Yet, gold prices keep trending up. Shares of gold mining companies have shot up even more--up 100% in some cases.

The markets are betting on deflation of asset values, including equities and real estate. Hence, both are likely to remain low for some time. And crude oil and other energy sectors have been battered. Agreed.

But looking forward (instead of through the rearview mirror), oil won't remain below $40/barrel forever. And when that dynamic reverses course, inflation will rule of the day.

And today, we had other things to worry about. Palestinians are shooting rockets at the Israeli border. Pakistani troops have abandoned the Afghanistan border and re-aligning themselves along the Indian border. The price of gold shot up over $20/oz within minutes of the news.

Today, we found out gold is not only a great hedge against inflation, it is also the currency of last resort in times of financial and geopolitical crises.

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