Gold was up yesterday morning, largely in line with a weakening dollar. Joining gold on the upside are crude oil, silver, platinum and palladium; bucking the uptrend was copper which was down in early trading.
Gold was up $2.65 to $1,653.90 and silver was up $0.17 to $31.63, bringing the silver/gold ratio to 52.3, roughly where it was yesterday.
Precious metals are holding a comfortable range in spite of a U.S. economy that continues to show signs of recovery. My guess is the fear of inflation is keeping gold prices afloat along with the general sense that the recovery is not all that solid.
It really makes sense when you think about it; in order for our exports to grow, our currency has to stay competitive with countries like China, which has a history of aggressive currency manipulation. If we’re going to maintain our edge in exports, the Federal Reserve has to fight back by being willing to devalue our currency by “easing” which is just a fancy term for printing money.
Putting aside the question of whether it’s a good idea to pick a fight with a country owning huge chunks of our national debt, this puts the Fed in a difficult position. Injecting too much cash into the economy can trigger hyperinflation but raising interest rates, which is what one would expect when the economy starts to pick up, can stall a recovery. Consequently the Federal Reserve frequently finds itself at odds between its dual missions of setting currency policy and maintaining employment.
This tricky balance the Fed has to walk is why I believe gold is holding in the range it’s in now. The Fed has to be a little creative in how it looks at consumer prices to deny that inflation is really a problem. They do that by not counting food and gasoline in the inflation index, which is fine for people who don’t have to eat or drive; for the rest of us, it counts.
I don’t see anything that’s a major downside for precious metals in the current economic climate; even the worst case scenario doesn’t look all that bad. The downer for gold would be if the U.S. economy really did pick up steam, more people started going back to work and the Fed started thinking about boosting interest rates. Gold prices would likely shift to a long-term bearish trend, but who would really mind when the rest of the economy is booming?
In precious metals, even the bad news can be pretty good most days.