Gold has certainly been on a tear to the upside recently. The SPDR Gold Shares (NYSEARCA:GLD) have rallied by more than $10.00 since May 21, 2012 when the GLD traded as low $148.84 a share. Today, the popular GLD is trading over $162.00 a share. Traders and investors are now anticipating that gold is ready to break out to new highs as the central banks jawbone about another quantitative easing or easy money policy program. Well, not so fast, inflation is soaring already in many parts of the world and the central bankers that control monetary policy may have to wait before acting again. If that happens gold and silver could be in store for another decline soon. On the flip side, if the central bankers of the world put the pedal to metal and dilute the major currencies around the world gold might just go to moon.
Personally, I believe that they will have to wait before implementing more easy money policies. First of all, corn and soybeans have really jumped this summer due to the drought in the Mid-West United States. Gasoline and oil prices have surged higher over the past six weeks. These are goods that are used by consumers. All of these price hikes force the consumer to curb their spending and this has a negative effect on any recovery that may be underway. The central banks know this.
Here is another important reason why the central bankers are not going to be so eager to cause inflation, there is very little short selling interest in the marketplace at this time. The central bankers have learned over the years that if they want to get the most bang for their money they need to cause a short squeeze in the market. The lack of short selling tells us that any new quantitative easing or stimulus program would not have the same effect as it has in the past. The central bankers know this and will most likely wait for a slowdown of some sorts to occur. Remember, “The Bernank” is the same guy who lowered the discount window rate on an options expiration Friday in 2008. This guy is not a dummy and he knows how the game is played.
Traders that are not in the long gold trade should not chase this trade right now. The best move is to wait until another major dip occurs in the stock market. Remember, we don’t trade stocks anymore we trade inflation creation by the central banks. Watch for that buy signal in gold later in the year when the central banks are more likely to act.
Some ways to play gold are through trading vehicles such as Sprott Physical Gold Trust
(NYSEARCA:PHYS), iShares Gold Trust (ETF) (NYSEARCA:IAU), and the Deutsche Bank AG DB Gold Double Long ETN (NYSEARCA:DGP).
Disclosure: I own gold and silver bullion since 2004.
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