Gold Update - August 23, 2012

Gold had been trading in a narrow range for several months.  It was almost boring to watch.  It was actually quite amazing to see such a lack of volatility.

Things have started to change this week.  Gold has had a good week, going above $1,670 today.  Is this a renewal of the bull market or just a tease for gold bulls?

I continue to say that much will depend on the actions of the Federal Reserve and the overall direction of the economy.  If we sink back into a deep recession, I wouldn't expect gold to do too well.  However, if that triggers a massive new round of money creation by the Fed, then we could see new all-time highs coming for gold.

Gold was already going up a bit when minutes were released on Wednesday from the last FOMC meeting.  Many analysts interpreted the Fed's comments to mean that QE3 would be announced at their next meeting in September.  I don't know if they are just reading it how they want it to be, or if this is a good analysis.  Perhaps they are trying for something similar to the self-fulfilling prophecy method.  In this case, they are predicting easing by the Fed so that the Fed feels compelled to do something and not let the market down.

I still have my doubts about QE3 being imminent.  The Fed has been very tight since the end of QE2.  I am not sure why it is holding back, but I suspect that the banking establishment does have some understanding that there are negative consequences to massive money creation.  Perhaps they are fearful that price inflation will get out of control quickly.  Perhaps they feel that the major banks are in dire straights and that the next QE needs to be saved to bail out the banks, instead of bailing out the stock market.

This makes the future gold price highly dependent on the actions of the FOMC at the next meeting.  If a massive new QE program is announced, then expect new highs from gold.  In fact, it would not surprise me to see it pass $2,000 on such news.  If the Fed disappoints the Keynesians out there and doesn't do much of anything, then it makes the situation much more uncertain.  I wouldn't necessarily bet against gold in such a scenario, but I wouldn't be counting on a huge spike in the near term either.

Your investing strategy should stay the same, regardless of the short-term movements in the gold price and the stock market.  If you set up a permanent portfolio and forget about it (except to rebalance once in a while), then you don't need to worry much.

If you are looking to accumulate gold, then it is hard to say if you missed a good buying opportunity just now.  But if you have been procrastinating, then don't wait any longer.  Just buy and forget about it.  You shouldn't worry about the short-term price swings.

I really believe that the next few years will be quite interesting.  There is going to be a massive correction of all of this malinvestment at some point.  I expect volatility in the gold price to pick up quite substantially.  Perhaps this week was the beginning of the next wild ride.