As I write this, the price of gold is back down to almost $1,200 per ounce. The price showed promising signs recently for gold investors, but it can’t seem to hold on to the gains (in terms of dollar profits).
Gold stocks have been a terrible investment over the last several years, but they also started showing signs of life in the last few weeks.
Gold has actually traded in a fairly narrow range over the last year or so. There are day-to-day ups and downs, but the swings haven’t been too wild. Just when you think gold is about to break out, either to the upside or downside, it reverses course.
One important thing to consider is that the U.S. dollar has been strong in comparison to other fiat currencies. In particular, the two other major currencies – the yen and the euro – have been really weak. Both the ECB and the Bank of Japan are in monetary inflation mode (more so the Bank of Japan up until now) and the economies in Japan and Western Europe are extremely weak.
I believe that gold can still go higher even with a strong dollar. It isn’t so much that the dollar is strong, but that it is just less bad than the other fiat currencies.
People ask if it is a good time to buy gold. I say, “that depends.” If you don’t own any, then you should certainly buy. If you own 40% of your portfolio in gold and gold-related investments, then you should probably sell a bit.
My target is generally around 25% of your financial portfolio as part of a permanent portfolio. This would include any investments directly tied to the price of gold. Gold stocks should be separate as a speculation.
In the next year or two, the dollar price of gold is going to depend on what the Federal Reserve does. This in turn depends on the state of the U.S. economy. If the economy sinks and the Fed starts another round of so-called QE, then I expect gold to go higher. If the Fed keeps its current tight money stance, then I expect gold to stay in its current narrow range.
The current CPI numbers show a decrease in price inflation for December. A lot of this is due to falling energy prices. The median CPI is usually a better measure and it is showing 2.2% year-over-year.
I don’t think Yellen and the Fed are worried about price inflation, unless they just aren’t showing their hand. Since price inflation doesn’t seem to be much of a factor right now, at least by their standards, I don’t think it is going to take that much to start another round of digital money printing.