With bonds and stocks faltering how will gold behave in the middle of stagflation between now and end of 2009?
Peter Oberois
Jun. 21, 2007

The gold market is affected by three sets of factors. First is inflation, second is the liquidity. The third is the budget and trade deficit. A complex algorithm involving the three really decides the gold price. The algorithm changes from year to year. The flexible algorithm modeling analytics has successfully pointed out a tight range of gold price for years.

Asian demand is a factor. However the above three factors are primary driving force for gold bullion. Gold stocks are more sensitive. Normally they lead the charge except when inflation is the main reason for gold moves.

Let us analyze the three factors one by one. Inflation is rising. The commodity inflation is high because of world demand for commodities. The grains, metals, oil and gas, softs, meats – all are rising in price. The shortage of commodities will be an issue in 2008-2009. The wage inflation is low at high end of the job market but for low-end job market there is a scarcity of people who can perform the $10 an hour job. The wage inflation is happening in India and China. The price of imported goods will rise sharply in the next several months and years.

The liquidity is plenty in the current financial environment. The Private Equity Funds and the Hedge Funds just do not know what to do with all of that money, but if the long bonds yield 10% by end of 2009, the liquidity will disappear. In absence of liquidity, gold price will have hard time in rising any higher.

The budget deficit will rise sharply as the revenues dry up in a stagnating economy with falling stock and bond markets. The trade deficit will also worsen creating a sever pressure on dollar. As dollar falls gold rises. That is how trade and budget deficit really affects the gold bullion price.

So inflation will rise. Liquidity will disappear slowly. The budget and trade deficit will worsen. Add all the factors, you get to see the crystal ball. Gold prices will rise but very slowly over the years till stagflation changes to deflation.

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