Thursday, February 28, 2008


STAGFLATION is back!!!!!!!!!
The recent consumer price index (CPI, an important inflation indicator) announcement, has renewed inflation concerns.
Stagflation is characterized by inflation, slow economic growth and relatively high unemployment ( expect more job cuts as the economy slows).
Stagflation dosent just go away, but is annoyingly persistant.
As Central banks around the world start to cut rates to boost slowing growth, they are unable to deal with rising prices. A combination of rising food grain prices and oil prices are the primary causes of inflation today.
Inflation + Falling USD +Central Banks cutting rates ==> High gold prices. Even the recent news of an upcoming sale of Gold by the IMF has had little effect on the enthusiasm of Gold Buyers.

Over the short term, although the news flow is positive for gold, a sharp sell off in world markets could lead to a sharp pullback in gold prices. For long term buyers, though caution is advised for now, adding to gold positions on declines in equity markets is advised.

As the arrow mark in the first graph shows, gold prices can crash sharply in an equity market sell off (May 2006), something that is increasingly likely as world markets factor in a US recession.

No comments: