There are still many investors in full denial about the sad state of the U.S. economy (Mr. Buffet, are you reading this?) If you don't believe me that America, and indeed most of the global economy, will be in a National Bureau of Economic Research recession in 2012, then take a look at the price of copper. Copper is now in an official bear market, as its dollar price has crashed from nearly $4.50 per pound in August to $3.14 a pound this past Friday. In fact, every base metal price has experienced a sharp contraction in the past two months. Not only base metals but energy prices and equity shares have pulled back significantly of late too. The message from the markets is clear; the global economy is slowing sharply.
However, this does not mean that gold must necessarily fall in sympathy. Looking back to the credit crisis, all metals prices fell in the fall of 2008, including gold. That's because Bernanke did not lower interest rates or increase his balance sheet from April 30th thru October 8th. But once the Fed stepped into action in the fall of that year gold rallied significantly. Likewise, an economic slowdown won't hurt gold prices this time around either, as long as Bernanke does not sit on his hands for 6 months. With Europe teetering on default, investors can be assured that the European Central Bank and the U.S. Fed will not allow another half year of deflation and money supply contraction to send the global financial system into ruins. Once an economy becomes fully addicted to inflation it is very hard to kick the habit.
So in a stagflationary environment like we see today, copper prices may languish while the price of gold increases.
Investors must understand that global central banks will do everything in their power to avoid reality and try to keep the credit bubble from bursting on both sides of the Atlantic. That's why taking advantage of this recent pull back in Gold may be the smartest move.
President: Pento Portfolio Strategies
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