The divergence of gold from traditional relationships with the euro, dollar and oil suggest that it is becoming an alternative reserve currency, primarily at the expense of the euro.
The last thing the real economy needs right now is a stronger Dollar. Other nations are already weakening their currenices competitively. It will be interesting to see how gold reacts in this type of environment with the fiat currencies being manipulated lower in sympathy with one another.
Oil will not recover in price while the House of Saud has our back. But at some point even they will concede to market forces, or some exogenous event, and then we will have the appearance of inflation. This may not occur until late 2009 or early 2010 when we expect the economy to begin to show signs of recoverery, at least relatively speaking. Until then the resurgence of gold is almost entirely a monetary phenomenon.
We believe that the stimulus is too backend loaded and unimaginative to affect anything sooner. Adding liquidity to the banks is as useful as filling the tank of a car wrapped around a telephone pole. Who are the banks going to lend to? And increased spending on health care, with the highest and least efficient per capita cost in the world, is like giving the driver of that car a bottle of vodka to ease their pain.
The consumer is insolvent, and until the median wage turns around will not be inclined to borrow for consumption again, as they should not. The nation must shake off the legacy of the Greenspan era and the economic cargo cult of the Chicago School.
It could be a long, hot summer.