In December, Bernanke observed that gold prices reflected general commodity prices and did not indicate rising inflation expectations (in the U.S.). As gold makes new all-time highs, it is now outpacing many other commodities. Many commodities have declined sharply in recent weeks due to fears about the sustainability of global growth. Gold has diverged due to fears about sovereign defaults, and perhaps more importantly, that the coordinated response to these risks will increase inflationary pressures. For example, the Financial Times reports that demand for gold coins has soared recently in Europe, especially amongst Germans.
The chart below shows how rapidly gold has diverged from the Dow Jones-UBS Commodity Index (note the DJ-UBSCI excludes aluminum, nickel, and zinc).
Source: StockCharts (click for larger view)
Silver is one commodity that has recently kept up with gold’s surge. In fact, silver has actually outpaced gold in the past week as it tests 52-week highs set last winter.
Source: StockCharts (click for larger view)
In December, I suggested that the large dip in gold presented a great buying opportunity. At that time, the dollar’s bounce from 15-month lows pressured the prices of all commodities, including gold. The dollar has gained 10 percent since then, and gold is setting all-time highs! This is a clear sign that gold is not just a play to anticipate a weaker dollar, it is a global play.
I also indicated that I agreed with “Mr. Commodities” Jim Rogers that it was time to buy more silver than gold. I have since sold the last of my long-term holdings of gold (it was NOT easy, and I even thought the Fed’s surprise discount rate hike would give me lower entry points for rebuilding my gold holdings!), including short-term holdings in gold miners, and I have increased my holdings of silver. Note well that I have not turned bearish on gold; I do think the bubble in gold skepticism is finally popping. Gold remains one of my favorite investments in the current economic climate. I just think that there is even more upside potential in silver given its economic as well as monetary uses. Going forward, I will continue to trade gold and silver miners on dips, increase silver holdings, and consider re-accumulating gold (via GLD).
Be careful out there!
Full disclosure: long SLV