whateverworks

Gold and Commodities

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I can never quite think of gold as a commodity since, in spite of a few serious applications, its main uses are to create frivolous jewelry and ornaments and to act as money. Actually, since currencies are no longer on the gold or silver standard it could be called ultra-money. Yet its price usually rises and falls along with commodities as a group.

Half the gurus online say that gold will continue to rise for some time and the other half say it's peaked and is about to plunge. The same is true of opinions on commodities in general. Certainly the recent bull rally seemed to prove the 2nd half right. I'm not so sure of that in the long run, though. The major concerns I've read are as follows.

* In a recession there is less demand for commodities like metals for construction and manufacturing. So commodities fall.
-- BUT the current demand for steel, etc. has been driven more by China and other developing countries. Those countries are not in recession, and they may not experience as big a slowdown as the US. There is disagreement on how dependent on the US China may be.

* Depressions are often accompanied by dollar deflation. When the dollar becomes stronger the price of gold, other metals, and commodities in general, falls.
-- BUT the current US recession has not caused inflation to slow. We have stagflation. Due to the nature of this economic slump (a breakdown in our financial institutions which is likely to continue for quite a while) the government will need to print more dollars for yet more rescue efforts. And the Iraq war requires more money yet. So I predict inflation for the forseeable future. As the dollar falls, commodities, especially gold, rise in value.

*Gold and commodity indexes have really spiked up recently. This looks like a peak.
-- BUT look at commodity index charts, over about the last 20 or 30 years. Commodities have been in the doldrums compared to stock indexes which have grown strongly. There is still more room for growth in gold and commodities.

*When recovering from a recession, the growth stocks tend to recover faster, not commodities.
-- BUT yet more ARMs are still scheduled to reset and more solvency problems still to come. We are nowhere near the bottom of this recession, much less starting to pull out.

It boils down to the optimists shorting these stocks and the pessimists, like me, going long. With so many investors turning optimistic on the reporting of each bit of encouraging news, an agile trader could make money by switching in and out of gold and commodities on each temporary turn of the market.