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Short-Term or Long-Term: Gold Has Done What It’s Supposed To

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Last month, US Global Investors CEO Frank Holmes offered three reasons he thinks the gold might hit $1,500 per ounce this year. His number one reason was rising inflation. In a recent interview on Bloomberg Radio, Holmes reiterated that high inflation looks good for gold in the near future. He also pointed out that whether you look at things from a long-term or short-term perspective, gold had done exactly what it is supposed to within an overall portfolio. 

Holmes opened the interview noting two other drivers of the price of gold  – a weakening dollar and the “love trade” in India and China. Overall, there has a been a boom in commodities as the dollar has lost strength. He then noted that about 60% of the demand for physical gold comes from China and India and that it’s highly related to their GDP per capita, which continues to rise.

This is the year of the dog and there’s going to be lots of gold puppies purchased – 24 karat.”

The conversation then turned to inflation. Lisa Abramowicz said some people have ratcheted back inflation expectations. But this doesn’t correspond with the latest data. As we reported yesterday, the Fed’s underlying inflation measure is close to a 12-year high. Holmes said rising inflation is going to have a major impact on the gold market.

The inflation is no doubt an important issue because the concern is if you use 1990 factors to look at the cost of inflation, inflation is running at 8%. If you use 1980 prices, inflation is pushing close to 10%. So there’s an argument that inflation is actually understated.”

As an example, Holmes cited the rapidly rising prices for cell phones and mobile technology, noting they are going up much faster than 2.7%. He also said his options on airline flights have dropped by 25% while the prices have gone up 300%.

Inflation is probably running closer to over 5%, so we actually have real negative interest rates under that scenario, and that bodes well for gold.”

The hosts asked Holmes what it would take for him to significantly alter his outlook on gold. He said he always recommends a 10% weighting rebalance of gold in a portfolio every year.

Why is that? Since the year 2000, gold is two times the appreciation of the s&P 500. Two times! And last year it was up 13%. That’s not bad. So, I give you short-term or long-term – gold has done what it’s supposed to do in an overall portfolio against currency volatility … it de-risks an overall portfolio.”

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