Barrick Gold Down Heavily After Bernanke Comments

Helicopter Ben testified before both houses of Congress today and that the recession might end this year. It appears that these comments sent the stock market up over three percent. Citigroup, which has been circling the drain over fears that the bank would require nationalization that would wipe out share holder value gained over 21% because Ben said that the US Government would not need to take such action. Gold fell to around $950 an ounce and, most mystifying of all to me, Barrick Gold (ticker symbol=ABX) and fell over 11%.

Wow. That must have been some speech. It’s hard for me to imagine Barrick falling 11% because Ben said the recession “might” end in 2009. After all, even at $950, gold is still close to its all time high. I guess people were figuring that, if the recession ends, gold will no longer be in demand. Therefore, the price of gold should fall, and Barrick will not make as much money. 

Here’s the thing they are missing. Continue reading Barrick Gold Down Heavily After Bernanke Comments

Deflation? Only for the Stock Market

I have to take a moment to pat myself on the back.

Around the start of the new year, I said that deflation was not going to be the main concern, and instead, it would be inflation that was going to be making a comeback. As it turns out, the January numbers are in and CPI inflation is up, not down .  Gold closed at $993 an ounce today and is poised to soon break into new all-time highs. In this way, gold is serving its traditional purpose — as the canary in the coal mine warning all of us that things are not well and that danger, (in this case, inflation) is on the way.

Not everything is going up, however. Yesterday, the Dow Jones closed at a 6-year low. Today it went down even more — so now it’s flirting with its 10-year low. The Dow-Gold ratio, which I’ve talked about before, is rapidly reaching new lows. Dividing the Dow’s close of 7365 by gold’s close of $993 gives us a Dow-Gold ratio of 7.4, which is the lowest it’s been in roughly 20 years.

But it’s going to keep heading down even further than that. Soon, we should be seeing a Dow-Gold ratio of three or even two …

Imagine the Dow at 5000 and gold at $2500 an ounce and you get an idea of what the future holds. Continue reading Deflation? Only for the Stock Market

The End of Deflation

About a month ago I made a prediction that the whole deflation story was done and that we would start to see a rise to inflationary expectations once more. I’m feeling pretty good about that prediction despite the price cuts many retailers were making during the holiday season. I even experienced one myself in going to get a last-minute Christmas gift for my mother. So, dropping by Best Buy and picking up Curb Your Enthusiasm – The Complete First Season, I went to the cashier expecting to pay the full $36 retail; unbenknownst to me, they were instead running a half-off all HBO-series sale — I got out of there for less than $19. You might say I experienced a bit of holiday deflation first hand.

You know, I have to say, it actually felt pretty good. Suddenly, I wanted to buy every season they were selling past the first I was already getting. That just goes to validate one of the oldest truisms in Economics:

The Law of Demand.

When the price falls, demand increases. So, you can ignore all of those Macroeconomic wonks who tell you that deflation causes people to hold off spending in anticipation of lower prices. It, and almost every other aspect of Macroeconomics, is just not true. The real reason central bankers hate deflation is because it’s primarily caused by people going broke from overextending themselves in credit, and now can’t afford to pay. That would be a tragedy for the bankers; because they’re the ones who made the loans to begin with, now they would be looking at losses. Bankers hate losses. They hate them so much, they’d much rather hide behind some cooked-up lie about the harmful effects of deflation in order to call for bailouts.

Going forward, we may see some prices fall, but the deflationary scare of October and November is starting to fade. With Obama coming in and promising to stimulate the economy by deficit-spending some $1 trillion dollars or so, in combination with our pal Ben cutting interest rates to zero, we can expect that the spectre of deflation has safely been put to rest.

Although, I am expecting one more strong down leg in the market in the next few months: expect to see the Dow approach 5000 or so in 2009. What’s going to be curious to see is if gold follows it down, as it did in October, or instead, rises as gold is supposed to do. It can be hard to figure these things out, but I’m expecting it to rise this time. There should also be less forced liquidation by hedge funds, because I figure they got rung out of the market already.

Gold stocks, like Barrick, aren’t nearly as cheap as they were in October and November — when it was trading at a PE of roughly 10. It just ended the year trading at a PE of 18 or so. That stock rewarded me greatly this year. I was able to buy in at close to the bottom and nearly double my investment.

I think I’ve got the fever of just sitting on my cash and waiting for the next plunge. Of course, the problem with that is, you never exactly know when it’s going to come.