What's Ahead: Inflation & A Gold Rally

Bill Fleckenstein MSN Money January 9, 2012

1/6/2012 11:57 AM ET

By Bill Fleckenstein, MSN Money

Markets enter 2012 with Europe's finances and inflation here at home still the big questions. Plus: There's reason to believe the recent gold correction may be waning.

Though 2011 was a poor (if not horrible) year for most investors in most markets, 2012 started off fairly strong for European and U.S. stocks early in the week. (Europe's bond markets, though, were largely unchanged Monday and Tuesday, after a decent amount of motion to close out 2011; they weakened as the week wore on.)

Meanwhile, the faltering euro did not precipitate enormous weakness in other currencies, though there was a bit of that. (The logic was that if the euro is weak then the dollar is strong, in which case you're supposed to sell everything except dollars. At least that is the current conventional wisdom, even though it doesn't make much sense.)

I'm sure precious-metals bulls were extraordinarily frustrated late in 2011, as gold and silver were sold regardless of the news. Certainly markets can be maddening as well as unprofitable at times, especially at the end of the year, when forced selling (or, in some years, herd-driven buying) causes the markets to ignore favorable news. Selling sometimes feeds on itself.

Bill Fleckenstein

Of course, when a trend is as powerful as the recent decline in gold was, I'm sure there were computerized trading programs jumping on the bandwagon as well, and betting on lower prices by getting short.

In any event, as the year ended, the stage was set for a potent rally in the metals, and that was what I think we saw starting on Tuesday. The questions now are whether the last week of December was the low for this entire decline, and whether we get some sort of test of those prices (as well as what such a test might look like).

Since so many people trade gold on a technical basis, the determining factor for what the next pullback looks like may be dictated by whether it can get over its 200-day moving average, at around $1,625 per ounce. I don't have a strong opinion at this point -- it would be almost impossible to have one yet. But it is entirely conceivable, given the forced liquidation and computer activity, that the lows for this correction have been seen.

No home-field advantage

Turning to the world at large, while the market "wrote the news" in the last couple of weeks (and the last couple of months) of the year, and the Standard & Poor's 500 Index ($INX)rallied, folks seemed to get quite giddy over the possibility of potential strength in the U.S. economy. I think those expectations are misplaced. I don't think our economy is all that strong. It may not be the disaster that Europe's is, but I expect those looking for economic strength here will be disappointed.

Be that as it may, the U.S. is not the major focus of the markets at the moment anyway. That honor goes to the continuing saga of Europe's financial situation. On that score, as folks have had time to think about what the European Central Bank is up to and to look at its balance sheet, it is clear that the ECB has embarked on a money-printing mission, even though it refuses to call its actions that. (Basically, "long-term refinancing operation" is European for "quantitative easing.")

What we don't know yet is how successful the effort may be, if the worst has been seen in the European crisis, or if it is (more likely) about to deteriorate immediately.

That's why they call it the bull's eye

On Thursday, James Bullard, the president and CEO of the Federal Reserve Bank of St. Louis, said on Bloomberg radio that the Fed was "very close" to its inflation target, and that the Fed could officially adopt an inflation target in 2012.

How to invest in gold

Now I ask you, if the Fed picks an inflation rate to target, knowing the government is doing the calculating and what a complete joke the Consumer Price Index is at capturing the true cost of living, is there any doubt how this experiment is going to end? Do people really think that while the Fed has a printing press, the inflation rate has any chance of having a minus sign in front of it (i.e., we would see deflation)?

As I have said many times, central banks the world over mean to print however much money it takes to avoid anything remotely approaching a declining cost of living, with only the Europeans being unwilling to stand up and say that is exactly what their goal is. Thus, the long-term outcome is not in doubt, although the short-term twists and turns are, as always.

So for Europe, the saga continues. Will the eurozone crack up before the European Central Bank panics, or will the ECB panic first (even more than it already has)? We will just have to see, but in the end, all roads lead to money printing, debased currencies and inflation until the printing press is taken away.

At the time of publication, Bill Fleckenstein owned gold.

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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Mail"},"omniAccount":"MSNPORTALSCP","ratingsControlId":"ratCntrlBinary","ratingsItemId":"scp:bbcdiscussion:9ddfb2f0-ff95-4bcc-baad-51fb174d0168","appUri":"http://social.msn.com/boards","pageUrl":"http://money.msn.com/investing/ahead-inflation-and-a-gold-rally-fleckenstein.aspx","ratingTags":["00120065-0000-0000-0000-000000000000","00000065-02a6-0000-0000-000000000000","ART"],"fblkShow":true,"fblkAppId":"","fblkRef":"","fblkTrkName":"","fblkTrkVal":"","twtShow":true,"twtTrkName":"","twtTrkVal":""}); }); /**/ 32CommentsNewestOldestBestWorstControversial12 tired of doom-gloom48 minutes agoYou can always count on Bill to cheer you up. Just once I would like to see something positive come out of his yapper. It is to the point that anything he has to say I already know will be negative. 1 4ReportSpamred billy1 hour agoSomeone, compared to silver it is worth 42% MORE! The FACTS are you make money by SELLING at a higher price than you buy anything. You make nothing by hoarding. But its OK to hoard if that is what you want to do. Just stop insinuating you are somehow making profits with "open" positions. Classic cars hold their value too, and are a lot more fun. And 1 more thing, its not a wise thing to do to be chatting online that you have "accumulated quite a hoard" of gold and silver. There are a lot of nuts in the world. Just saying. Happy New Year. 1 0ReportSpamSomeone (silversaver) 2 hours ago

Red (know-it-all) Billy, how much has the value of the dollar fallen since 1980?

Care to compare notes at the end of the decade?

2 1ReportSpamMarket Shill3 hours agoDeflation is nature's way of clearing out all the dead wood. 7 0ReportSpamGetzville 494 hours ago

First statement, " Though 2011 was a poor (if not horrible) year for most investors in most markets" is WRONG!

The S&P finished UP for 2011 when dividends are added in. This is hardly poor or horrible performance. Hucksters like this make me sick.

What we need is a year end review of how these "soothsayers" fared with last years prediction. No Financial Journal has the guts to print this these days.

5 8ReportSpamred billy4 hours agoRecent corrections? Precious metals will shine in the long run? Since 1980 silver is DOWN 42%. Stop fighting the tape. You precious metal junkies simply want to buy silver and gold to "accumulate quite a hoard". You have no intentions of buying low and selling high. You only want to "hoard" it. Which is fine and dandy, don't get me wrong. Just don't tell me you are making money because you are not unless you buy low and SELL high. 100% of the PM junkies I personally know never sell. And they want to talk about "all hell breaking loose". When "all hell breaks loose", and the currencies collapse, and everyone runs out of cash, who you going to sell your silver too? And if everyone is running out of cash (like 2008) gold and silver plummets in value (like 2008). Its not for me. 8 6ReportSpamnobabyboomers4 hours agoWhen we have a president and congress that spend trillions of dollars we don't have, we have set the country up for high inflation. Obama has increased the money supply over 300% and we have put trillions in Europe to prop them up. Our Obama money is going to be worthless. Gas will be $10-15 dollars a gallon. 22 9ReportSpamSomeone (silversaver) 5 hours ago

I invest all my extra income in gold and silver and have accumulated quite a hoard. It's still one of the best hedges against inflation and will continue to be so. A large reason for the recent corrections is manipulations in the paper ETF markets as much as market forces. Precious metals will still shine in the long term for 2 reasons that can't be disputed. The money supply (debt creation) will continue unabated and the "Fed" will be unable to raise the prime lending rate.

People cite the gold bubble of the 1980 as proof of gold's demise, yet they fail to mention that the reason it happened is that the prime rate was raised I believe to 11% to combat very high inflation. Wall St. and the government love cheap money and as such the prime rate will remain low as far as the eye can see.

6 6ReportSpamRay USA5 hours ago

Wow! The whiners about global competition are out in force today. Trying to stop money and production flowing from high cost areas to low cost areas is like trying to plug millions of holes in a dike. We as Americans simply need to deal with the global trade situation and try to make our country more favorable versus the competition (and it is not all about labor cost).

Fleckenstein is right as usual. Inflation is occuring now and it will increase in the future. We simply don't realize it because the government is inflation's referee and scorekeeper. Gold will continue to rise in the long run until both debt and monetary policy is under control (good luck with that). If we re-elect Obama, buy gold and hunker down for long term economic stagnation.

22 4ReportSpamvanhalen not vanhagar5 hours agoHey Fleck How high is silver headed? To all you gold and silver only bugs remember this. Its only good until you turn it into dollars because Wal- Mart wont take it as payment. Oame banks will take gold now as a down payment on a house but McDonalds and Burger King dont take it,neither will the IRS. DIVERSIFY , ALLOCATE and PRAY. 9 8ReportSpamVolckerFan6 hours agoUmm... we had some mild deflation in late 2008/early 2009. Not on the core measure, but on the headline.. and the reason it's avoided is that pretty much every economist out there is in agreement... deflation is much worse than inflation. Of course, I think Bill's been in the horde screaming about high inflation for the last 3 years... I think his model's broke, or at least not in tune with the circumstances currently present. 10 3ReportSpamtopspot5618 hours agoThis is all so confusing to me. Two or three weeks ago I was reading we were going to have a lost decade and deflation like Japan. Then one day the market's up the next day it is down. Actually it is up and down several times a day. Does the outlook change several times daily ? The employment rate improved in the recent report. Now economists are saying we are starting on a recovery that will gain momentum. From one report ? What happened to we were going to have a new standard high unemployment rate ? 17 4ReportSpamerwi41822 hours agoAll the yak about fiat currencies, hyperinflation, and safe haven really began to be peddled to the public when the GLD ETF was launched. Anyone who believes gold and silver are any protection against long-term inflation, needs to check with the 200 year trend for both metals. Gold and silver at current prices are more belief than substance. Yes, gold will revert back to the long-term mean! 10 9ReportSpamEric Roll (free_speech_always) Sun 2:23 PM

Willowin said: "Unlike Gold it [silver] is used in the electronics we have all come to see as necessary."

So is gold.

13 4ReportSpamWillowInTheWendSun 12:01 PM

I noticed that nobody is mentioning Silver as a viable investment. Unlike Gold it is used in the electronics we have all come to see as necessary. What are you thoughts on investing in Silver at this time? Commodities are a good bet at this point. But the commodities fund my 401(k) fund offers has Fanny, Freddie and some banks as the main players in the fund. I was told the reason is that they buy futures in commodities so I'm thinking that is not a good fund to invest in. They are now offering GLD stock which the real gold is held in London. Our other choices just plain suck. I'm considering taking a loan on my half of my 401(k) and buying Silver, food, and ammo. Even if I couldn't pay back the loan I think I would still be ahead with the greedy managers having control of my hard earned 401(k) funds. Thoughts?

26 6ReportSpamAverage Joe American - Tampa FLSun 11:39 AMI guess we should be calling you Lynn Goldfinger. It would be a little different if you were a guy, as you could imagine. Well, you seem pretty informed about the market, so at least you have more sense than the average gambler out there. Good luck, and I hope that you are only partially successful, since a bigger payout would mean the economy isn't doing so hot. 5 0ReportSpamLynn XSun 11:32 AM Fundamentals appear in place for gold to resume its rally. Gold surged more than 35% to $1,920 an ounce in early September. In just a few weeks, though, gold plummeted more than $350 to near $1,550 an ounce. Gold production costs stand at around $800 an ounce, according to Barclays. That means miners are set to make a 98% profit per ounce if the metal is sold at spot prices. This will definitely benefit large-cap miners like Goldcorp - GG and Barrick Gold - ABX. I own shares in Goldcorp and Barrick Gold. I can hope I am ahead of the predicted rise in gold in the coming year and make some money on these positions. 8 6ReportSpamAverage Joe American - Tampa FLSun 11:20 AM

Remember a few months ago when the hypesters were all about gold hitting $3K/oz. I said No way Jose and threw out a few common sense reasons why it wouldn't and shouldn't. That is if we wanted to have any semblance of civilization as we know it! This feels a little bit like when I was trying to tell everybody during the housing bubble to watch out. Did they listen then...??????!!!!!!

This is a different scenario with different variables and triggers. But the same concept remains where greed and irrational thinking skews the natural order of the economy. The market should actually be much more predictable than it is. But you gotta keep the crooks and gamblers in their cages. Good luck with that!

14 5ReportSpamSomeoneSun 11:14 AMi got the nafta speach first hand.the ceo of my company called us all in to the lunch room and said"nafta was signed yesterday and heres why your all going to lose your jobs."he then gave us a very nice one hour presentation on how they could make much more modernizing the companies equipment and hiring mexicans to run them.we were making 10 dollars and hour they were going to pay the mexicans 1.and thus began the decline of america.for me it meant the loss of my home 52 5ReportSpamAverage Joe American - Tampa FLSun 11:04 AM

At least Fleck isn't sounding too much like a used gold car salesman this week.

Mr. Laus' comments below seem quite prophetic and bear considerable pondering. If true, the question turns to where do we go from here? We meaning the American people as a whole...all 99.9%. (only a small number of mega rich really controls things). Does the rank and file citizen acquiesce and continue supporting the "great plan" to outsource the fabric of our economic and cultural souls by standing idle? I think not!

The American Public has graduated from wising up to mobilizing resources in the fight against the WS/D.C. demigod society that brought to the forefront the ingenious concept of welfare for the rich. Keep fighting America!

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$.dap("&PG=INVIHP&AP=1089",300,250,"dapAd2");FeedbackRECENT QUOTES/*Turning to the world at large, while the market "wrote the news" in the last couple of weeks (and the last couple of months) of the year, and the Standard & Poor's 500 Index ($INX)rallied, folks seemed to get quite giddy over the possibility of potential strength in the U.S. economy. I think those expectations are misplaced. I don't think our economy is all that strong. It may not be the disaster that Europe's is, but I expect those looking for economic strength here will be disappointed.