A Glimpse Into The Psychology of Modern Investment

After the Fed monetized 300 billion dollars of the US’s debt in buying back long-term treasuries, inflation worries are back in the spotlight. Many use precious metals as a hedge against inflation, which has been kept at bay since late last year. But even if inflation rises, as many expect it will, gold seems to be having a very tough time cracking and staying above the 1000-dollar mark. Is this due to a supply and demand issue or has gold along with other precious metals used as investments hit the psychological glass ceiling?

The question of whether or not gold will see $1000 plus is quite important to most precious metals investors. If it doesn’t get about the thousand-dollar mark, and inflation continues to rear its ugly head, we could see an even larger loss of wealth around the world. This would occur in a scenario in which the dollar’s value plummets and investors seeking safe haven turn to gold as insurance against widespread inflation or even possibly hyperinflation. It would seem that a health injection of gold or gold stocks would be beneficial to any investment portfolio at this time.

Stocks have done curiously well the past two weeks, almost to the point of allowing the Dow Jones Industrial Average to actually gain traction in the month of March. Usually, when stocks are doing well, gold does not, and vice versa. But something interesting is happening. The current economic crisis we find ourselves in is uncharted territory, somewhere we’ve never been. If stocks continue to recover despite the obvious inflation worries, we could see gold and other precious metals as well as commodities on the rise as well. Perhaps the psychological barrier of finding the stock market’s bottom has been broken, and now we will see the return to $1000 plus gold. The last time gold topped one thousand dollars for any real length of time was March 2008.

Internationally the demand for gold is moving like and accordion. As the price rises, demand tends to cool off until the supply catches back up to it, lowering the price once more. This cycle is repeated over and over until the markets stabilize. But with the US locked in an economic recession and many other European countries following suit, gold is still a very attractive investment. This peculiar up and down behavior is a breeding ground for day traders and speculators who tend to manipulate the markets through short sales. At least in the US, this issue rings true, but world-wide the demand for gold is still outstripping the supply.

Look for gold and other investment grade precious metals to rise along with mining stocks in the mid term. With inflation certain to reappear in the next few months the only sure bet in this unique market scenario is gold and related services and products. The world-wide recession is not likely to reverse itself in the next year or two so anyone who wants to add a little insurance in their portfolio against inflation should look to precious metals.