Something Worth Mentioning

Today was a very solid day for the portfolio, but I closed down far from the high point due to the sell-off in my gold positions. I am now down around $500+ on my gold positions, which is a significant draw-down.

Here is my opinion as to the current dynamics of the gold market. I think the current price action is following a circular logic. First, we get higher inflation numbers in from the government. At that point there are several options for traders. Option A - would just be higher inflation is there - lets buy gold. I think this is what was happening in August and September. Now though we are at a new point - Option B - where traders make the extra connection. Higher inflation is expected to be combatted by higher interest rates by the Fed. Perhaps as high as 5.5% fed funds by next spring. That is a substantial reduction in the credit available to the market and that should absolutely annihilate - housing, the stock market, and the current expansion. It should also kill gold.......perhaps. I am thinking of some other positives for the gold trade though and am considering enlarging my position based on the following two catalysts:

1) CPI number is out on 10/14. The consensus number is 0.9%. If you annualize that you can come up with an annual inflation number around 10.8% - (obviously this is not the CORE number that all of our economists love which will probably be closer to 3% annualized.)

2) Another Yuan revaluation. Greenspan and Snow are going on a little vacation to the Far East to strong arm (or beg?) the Chinese monetary authorities to allow another revaluatoin in the Chinese Remnibi - maybe another 5% adjustment or 10? Link: http://www.msnbc.msn.com/id/9582872/

I think at some point there needs to be a recognition that inflation may be out of control already. I mean if you think about oil prices have only been truly elevated for 2005. In 2004 they were in the 40s which was significant, but now we are in the 60s and have been for some time. As these costs trickle through the economy a vicious inflationary cycle can get under way.

I am being too biased? We also have to consider the bearish side - as it is clearly what is prevailing right now in this "correction?" in the gold market.

Regards,

BG