Gold: A Crowded Trade?

Media coverage says gold is becoming a "hot trade" for big investors...

IS GOLD A CROWDED TRADE right now, asks Brad Zigler of Hard Assets Investor.

Crowded? Define "crowded".

If by "crowded" you mean traders trying to squeeze through the doorway to get into or out of the market, then no, it's not crowded. Crowded was the summer of 2007 when speculators elbowed their way into gold and even more crowded at the exits a year later.

Speculative interest in gold has built up since November '08, but certainly not at the vertical trajectory we saw in the last bull wave. Not yet, anyway.

In the Gold Futures and options market, speculative momentum has been building from the 13-month low in Gold Prices hit last fall. But it's not been the headlong rush that characterized the '07 run-up. Now, that's not to say that a rush can't or won't develop. It may, under the ministrations of those who DO crowd the market with extravagant claims about gold's upside.

Investors' complaints center around the shortage of physical Gold Bullion at the moment, meaning retail-sized gold products in the form of Gold Coins. But as for US-minted gold coinage, so for the rest of the world's official government-stamped coins, and the shortage is more a manufacturing bottleneck than anything else. The wholesale professional market is experiencing no shortages at all.

Meantime, we've established a disconnect between inflation and the Gold Price in previous analysis here at Hard Asset Investor. Gold's not a perfect inflation hedge. Since much of the world's economic health is keyed to oil prices, crude may be a better inflation hedge than gold.

Oil isn't money, however. Gold is. When the stuff hits the fan monetarily, people turn to gold as a safe haven. Monetary inflation – not to be confused with the price inflation measured by the Consumer Price Index (CPI) – downtrended in 2008 along with the Gold Price.

One other measure of expected inflation is the yield offered by Treasury Inflation-Protected Securities (known as TIPS for short). These yields are keyed off the Consumer Price Index, which didn't start disinflating until much later in 2008. Keep in mind that CPI is a monthly lagging indicator. Whereas Gold Bullion, and the sentiments about monetary inflation reflected in its price, is repriced daily.

Monetary disinflation is leveling out now, and that's reflected in gold's recent price gains. It'll take a while for consumer price dis-inflation to turn around, showing what gold already says is happening to the outlook for living expenses in 2009 and beyond.