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How about that? The Fed chairman revealed last week that inflation is now the Fed's primary concern. Imagine. Crude oil prices have risen by nearly 50% this year, and food prices continue to soar.
Nice to know that the Fed finally thinks inflation might be a problem. In fact, the Fed is now hinting that interest-rate increases might be in order.
But here's the problem: The economy is faltering, and rate increases sure won't help matters. Does anyone really think that the Fed will push interest rates higher, thereby putting more pressure on the slumping U.S. economy? No chance.
The inflationary pressures are almost wholly commodity-based, and the Fed has little in its arsenal to combat the rising costs of fuel, corn, wheat, etc. Compounding the issue is that the increase in energy prices is not related to surging U.S. demand (which a strong domestic economy might cause) but to rapidly rising demand from emerging economies such as China and India. Aside from triggering a deep domestic recession that slows global growth, there's little the Fed can do to alter the current inflationary picture.
So while the price of gold and gold stocks plunged last week, it's my belief that the pullback was exaggerated given the economic realities of the situation.
Nevertheless, the reality is that the market's mind-set around inflation has changed. There is now belief that the Fed will do what it takes to battle rising inflation. Even though there's not much they can do, investors are apt to shy away from those stocks and industries that traditionally serve as inflation hedges.
Consequently, I will place an order to sell all my shares of Kinross Gold (KGC, news, msgs) at $19 or higher.
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