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It’s All Part Of The Equation gold,9/12/2010

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The stock market, particularly the Dow, has been in a very tight range over the last week. During the last 6 trading sessions, the Dow has closed between 11,359-11,382. But it won’t be too much longer before the index is at a new high for the year, as the inflation trade will be in full effect here pretty soon. Where else are people going to be putting their money if they start dumping bonds? In cash?

Gold finally was able to stem the 2 day slide that it had endured, the precious metal closed up $6 to $1,386. I didn’t expect the correction to last more than a few days, and I think gold will start working its way higher now. If I’m wrong then it obviously needs to hold the 50 day.

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The ^HUI had a mild up day as well, closing higher by 5 points to 568. The chart still looks good, as the index remains in the uptrend that has been in place since the summer.

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I’m not sure why gold investors are worried here about rising bond yields. They certainly aren’t going up because strong economic growth is on the immediate horizon. There isn’t going to be a strong recovery unless housing comes back, and the only way that happens is artificially through inflation. If yields keep rising it’s because we are about to have some serious inflation. This isn’t negative for gold, like I have said before, the Fed can’t raise rates at this time.

This is how I think it all will play out. For starters bonds will continue to be sold off, as everybody that has been betting on deflation comes to the realization that they are wrong. Yields will keep rising over the next 6 months. I don’t think they go crazy though, but they will be higher than they are today. The stock market will continue to go up, and gold and silver will be significantly higher. The Fed will not have taken any steps to try and stop inflation. Actually it will be busy buying bonds trying its best to suppress yields. The Fed won’t be able to move on rates until late 2011, and by that time it will be so far behind the curve that it will take another year of aggressive rate increases before it can contain inflation. Like I said yesterday, rising yields are all part of the equation.