Why Gold is Rising (Hint: It's NOT Inflation!)

By: Jill Schlesinger
Topics: Financial Decoder

This post by Jill Schlesinger originally appeared on CBS' MoneyWatch.com.

With the same fervor that causes pundits to prematurely declare the death of the dollar, so too are worries about future inflation bubbling up. You hear people saying, "of course inflation is coming, just look at the soaring price of gold as an indication!" Sorry to disappoint, but but as a former gold trader, I can tell you that it's been a long time since gold prices traded as an inflation hedge. Rather gold has traded alternatively as a fear asset or a risk asset.

(AP)

When investors think the financial world is coming to an end, they sometimes turn to gold. This is in line with my dearly departed step-grandmother, who said that it was the gold that her mother sewed in the lining of her cloth coat that allowed her to escape the Nazis when they marched into her Hungarian village. Alternatively, when you see stocks, bonds and gold all rising concurrently as the dollar is dropping, that's a pretty good indication that ol' fashioned greed is back on the scene, courtesy of the world's central banks.

There's no inflation right now and in the face of the worst financial crisis since the Great Depression, the Fed is more worried about deflation than inflation. For the time being, the Fed is probably right - there's no evidence of inflation of any kind. When the Labor Department reported August CPI, it showed that prices declined 1.5% from a year earlier. Chances are that when the September numbers are released Thursday, we won't see any major new spikes.

With no inflation now or even in the pipeline, it's hard to make the case for gold as an inflation hedge. Just chalk up gold's move to plain the pendulum of fear and greed. For now, greed is dominating.

More on MoneyWatch:
• Seniors: Is AARP Looking Out for You?
• 29 Fees We Hate Most
• Why You're Paying More ... for Everything
• End of Recession? Not So Fast
• How to Lower Your Property Taxes

(CBS)

Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Prior to the launch of MoneyWatch, she was the Chief Investment Officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.

Jill Schlesinger
>> View all articles
Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.
Follow on Twitter »

6 Comments Have Your Say
Email Story Send to a Friend
Share This Tell Your Friends
Tweet This Tweet This
More Share It

Add a Comment


by goldcoinsgain October 27, 2009 8:35 AM EDT: gold every one need that stuff but buglers also
Thanks for the great reading, we buy <a href="http://www.goldcoinsgain.com/gold-bullion-coins.html">gold</a> bullion in a recession. I will pass this on to our ira clients to read; Reply to this comment


by DougDiggerEberhardt October 12, 2009 10:25 PM EDT: Gold and the dollar have been almost perfect inverse correlations since the year 2000. Before that it doesn't really matter because the U.S. dollar didn't really have any competition. Now it has the EURO, ETFs and other currencies that are easily acquired.

Nothing goes straight up so gold is due for a pullback and the dollar for a bounce higher.

Greed? At $1,000 an ounce? Greed will come when gold is north of $2,000 in the next few years. Gold is presently in its second stage. Greed will come, as it always does, in the third "euphoria" stage. That won't arrive till the dollar index falls below 72.

If gold was a "fear asset," then why did it fall so hard from March of last year when the stock market was losing its lunch? Answer: the dollar index was rising.

I have challenged financial advisors on how gold fits into a diversified portfolio. You can read about the challenge via my blog at http://fedupbook.com/blog and clicking on the "gold" tab.

Disclosure: I don't sell gold. I write about it.

I also had a good exchange with one of your Moneywatch.com advisors, Larry Swedroe: http://moneywatch.bnet.com/investing/blog/wise-investing/dont-believe-the-hype-about-gold/842/#comments He's the only person to take up the challenge with me.; Reply to this comment


by stevador39 October 12, 2009 2:50 PM EDT: INFLATION IS REAL FOR THE AVERAGE PERSON. THE PRICE OF ENERGY HAS TRIPLED THE PRICE OF BASIC FOOD HAS DOUBLED IN TWO YEARS. THE ECONOMIC FUTURE OF THE U.S. HAS BEEN HANDED OVER TO WALL STREET CRIMINALS. THEY WANT TO CREATE INFLATION. THE FISCAL POLICY IS CREATING INFLATION.; Reply to this comment


by Gold_Bug October 12, 2009 2:25 PM EDT: Is gold a commodity or a currency .Gold at $1,500 is inevitable
source :
http://goldbasics.blogspot.com; Reply to this comment


by Gold_Bug October 12, 2009 2:22 PM EDT: Is gold a commodity or a currency .Gold at $1,500 is inevitable
source :
http://goldbasics.blogspot.com; Reply to this comment


by sjc_1 October 12, 2009 1:55 PM EDT: The dollar has lost a lot of its value on world currency markets in recent years, huge deficits and a ballooning debt do not make for lots of confidence. Gold is the usual commodity that attracts interest during times like this.; Reply to this comment