With the DOW Industrials closing above the 10,860 level on Friday September 24th, market observers should once again question the applicability of the phrase “Sell in May and go away”. For those investors who sold at the beginning of May 2010, when the DOW was above the 11,000 level, current levels marginally serve to support their late-spring decision. For those who sold later in the month, while the DOW struggled to remain above 10,000, there’s likely a lot of second guessing going on. Regardless, September is shaping up to be the best September in some 20 years, with a month-to-date return of 9.4%. While the month isn’t quite over and remembering that October can sometimes prove to be troublesome – my guess is that May sellers will once again be disappointed that they followed an outdated market idiom.
The price of gold breached the $1,300 level Friday without showing any signs of near-term weakness. Aided by a weakening US dollar and ongoing concerns over federal spending and growing budget deficits, possible tax increases and a decidedly uncertain business climate, it seems obvious that the precious metal has some room to go. With that said, it’s important to remember that buying at all time highs has never proven to be a winning investment strategy.
Though I’ve been skeptical of gold’s ability to remain at levels above $1,200 and have taken “Gold Bugs” to task more than once, it’s difficult to ignore what the gold market may be telling us. The global demand for gold is increasing as a global economic recovery continues, the US dollar continues to weaken against other currencies and US policy makers are likely to accept yet further weakness before structuring monetary policy support in favor of the domestic currency, and investors fearful of federal fiscal policy changes expect long-term inflation to become more meaningful than near-term deflation concerns. None of these come as a surprise of course, but gold’s movement in contrast to other economic pressures remains curious.
Typically, a weak dollar and increasing gold valuations (in US dollars) signal inflationary pressures on the horizon, and there are certainly some indications of this outside of the precious metals market. The price of corn and other agricultural commodities are once again on the rise and personal and household incomes have increased (albeit slightly) despite a less than optimal economy.
On the other hand, energy costs have remained relatively stable for many months now, the cost of housing and transportation have continued to decline, and average retail prices have steadily decreased. Increases in productivity and large scale buying opportunities have aided manufacturing and retail prices on the whole, even though some consumers still find periodic and sometimes surprising price changes at the grocery store.
In recent public statements, Fed Chairman Ben Bernanke has made it clear he remains concerned about deflation and is prepared to take additional aggressive action to keep price levels stable. In truth, he sees it as the most pressing threat to the economy. Were it not for the current weak dollar policy and ultra-low interest rates, deflationary pressures may have already become problematic. The trick central bankers will need to pull off is to tighten monetary policy and strengthen the dollar as deflationary pressures wane and inflation becomes more of concern.
Disclosure: No positions
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