With Washington’s circus performance in full swing, reader Tony had this to say:
The Fed is printing all this money to create the cash needed to fund whatever form this bailout takes, right?
And if, ultimately, a plan will earn a profit for US, how do we know the money will be applied to reduce the ridiculous dept they are creating?
Would you invest in gold given the inevitable inflation that printing all this new money is creating?
Sure, the devil is in the details. We won’t know yet what checks and balances will be applied to be sure the debt recreated will eventually be reduced. My concern there is too that if any profit actually comes to back that it will be spent in the usual fashion and not applied to strict debt reduction. This is how government works, but I can’t be 100% sure of that this time given the outrage of the citizens about the bailout in the first place.
Under normal circumstances, I would agree with you that such an sizable extension and expansion of credit would have inflationary consequences. However, the enormous destruction of assets (now up to some $500 billion), which we witnessed over the past year, is definitely a deflationary force to be reckoned with. I think we have entered unchartered territory and, not being an economist, I would guess that these two forces, at least temporarily, would cancel each other out. Long-term, however, one or the other may prevail.
While in times of uncertainty gold has been a great hedge, it has recently displayed tremendous volatility. If you prefer holding physical gold (coins, etc.) that’s one thing, but investing in an ETF like IAU, is another.
As you can see, IAU is currently bouncing around its long-term trend line and could break either way. From July to September, a huge correction occurred and a subsequent rebound retraced most of those losses.
If you are an aggressive investor, you can take a position here, but you need to use a trailing sell stop. Since gold appears to be news driven right now, a $100/oz drop or gain can happen at anytime. Personally, I have no positions and prefer to wait for better confirmation of an upside breakout.