Money Managers Live

Inflation Where Art Thou?

Written by Nate White, Chief Investment Officer of Paragon Wealth Management.

Could gold, the traditional and popular hedge against inflation, actually perform poorly during an inflationary period thereby frustrating its use as a hedge?  For years now many have been worried that due to unprecedented central bank easing and huge government deficits we should be experiencing high inflation.  Instead, with the CPI at 1.6% inflation is benign at best.  We can “thank” the financial crisis for that.

The price of gold seemed to confirm inflation worries by having a stellar decade long run from $300/ounce in 2001 to over $1,800 by August of 2011.  Since then, the price of gold has stalled.  Perhaps gold moved up less because of inflation worries and more because it was a recipient of the money issuing forth from the central bankers?  Now in anticipation that the easy money policies could start to end within a year or two could this be the reason that gold prices are stalling out?

What is equally interesting to me is that now as the economy is starting to strengthen somewhat as it leaves the financial crisis behind we could actually be on the cusp of inflation starting to pick up.  As confidence returns, the massive reserves in the banking system could finally start to move out into the economy as lenders open up and demand for credit increases.

Productivity and margins are strong in corporate America and at this stage of the economic cycle as demand picks up they will have to hire more workers to keep up with sales.  This would result in the wage inflation that the Fed likes to focus on.  However, as inflation picks up and the Fed finally has to start reining in the money supply gold could actually decrease.  It would be the opposite of what happened over the past decade.  Just as stocks often price in all of the good news perhaps gold has done the same in regards to inflation?  Asset prices love to move ahead of the actual events.  Perhaps it is a good time for gold investors to lock in some gains if they were using it as a hedge against inflation.

Disclaimer
Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

What About Gold?

photo by motoyen

Written by Dave Young, President of Paragon

We are regularly asked our opinion on whether or not investors should buy gold. We've written about it in the past, but I wanted to give you an update of where we stand now.

Gold is being promoted on a host of television shows. There are a nonstop barrage of advertising promoting it.

Usually buying gold through the brokers that are pitching it on TV is the most expensive way to buy it. If I wanted to buy gold, I wouldn't buy it through those costly pitchmen.

For the record, at Paragon we are not buying gold right now. That doesn't mean we are anti-gold, it just means we don't want to buy it right now. Over the years we have bought and sold gold many times when the valuations made sense.

Our reluctance to buy gold doesn't mean it won't keep going up from these already stretched levels. Once a trend establishes itself, it can keep running as long as people keep buying.

An upward trend is not a reflection of value, it simply means there are more buyers than sellers. Right now there seems to be no shortage of buyers.

We aren't buying gold right now because we cannot justify that it is worth what it is selling for. It's valuations are severely stretched.

Fear is driving gold purchases.

There is uncertainty in the Middle East, issues with Libya, European debt issues, endless U.S. Government spending and the all encompassing fear of inflation.

At Paragon, we make money by buying early in trends and selling when the trends start to roll over. Most trends in the market last between six and 24 months. While we don't know how much further gold will run before it rolls over, we do know that it is not early in its trend. We also know that it is anything but cheap.

The only way I would buy gold right now would be for a short-term trading play. However, if I really wanted to make a short-term trading play on metals, I would buy silver instead of gold. It tends to follow the same trends as gold, but move a little harder up and down. Bottom line, I would not take a long-term position in gold at these levels.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.