Has Gold Appreciated Too Much to Be Inflation Protection?

January 27, 2009

To put things in perspective, gold has only moved above $900 for a few brief periods historically – gold prices we’ve only seen in early 2008. If you’re looking at ways to invest at these prices, the SPDR Gold Trust ETF (NYSE: GLD) is an easy way to do it.

Option buying has been very bullish – traders still think the price has higher to go. And they may have something there. Gold does well in inflationary environments.

It’s no secret that the Fed has been flooding the markets with cash. And eventually all of that cash is going to cause inflation to creep up. The question is whether the price of gold has appreciated too much to be the inflation protection it needs to be?

Inflation has been ticking in at the lowest levels since 1954. Other than the influx of capital, there isn’t another major inflationary pressure out there. Food and fuel don’t seem to have it in them, and decreasing wages from an increasingly unemployed populace will continue to drive down prices.

Or, it could be that all of this inflation-speak is nothing more than a smokescreen for the fact that the United States and China haven’t been playing nicely. And the rush to gold has been in response to the world’s two largest economies slap-fighting over Yuan rates.

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