Tuesday, October 25, 2005


Fed Using Inflation Scare To Move Long Rates Up?

The Resource Investor explains what it sees as an 'inflation scare.' "With the US Dollar Index at 89, it seems fairly clear that gold as illustrated by its recent performance has decoupled from the dollar, and is rising in all currencies. But the major move in gold in the last quarter seems to have come from what many perceive to be an inflation threat, which has come completely out of the blue."

"With many funds playing momentum and trends in these modern capital markets, and with the fourth estate ready to cheerlead and/or scaremonger about the latest threat or cognoscenti theory, the inflation story has gone from barely receiving mention a month ago, to substantial column inches today."

"The catalyst for all of this seems to have been Katrina..Greenspan was using this as a way to get the move he wanted at the long end of the curve. Stephen Roach seemed to concur, as he was quoted as saying 'The Fed seems determined to set interest rates high enough to ensure it has regained traction with the real economy and asset markets. If it needs the excuse of an inflation scare to pull off the policy normalization, so be it.'"

"The National Post reported that Roach didn’t believe inflation was going to be a problem, calling current numbers 'hardly a major breakout from the disinflationary channel of the past 10 years.'"

"The question is, if gold breaks the $500 mark on the back of what would appear to be an engineered inflation scare, and if nearly all of the new money coming into gold is from players seeking protection from said inflation, what will happen when it is shown to have been 'tamed'?"

"Gold will do equally well in a deflationary environment, as in an inflationary one, and we are still in the early going. If and when the danger of inflation subsides and the hot money flees the sector and the metal, it doesn’t mean that the game is over, it may be just beginning."

I think this reasoning is plausable. The Fed denyed it was targeting home prices and then made a big deal about oil prices and inflation.

Sorry the link isn't working right now, hopefully it will be reestablished later.
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