Ahead: Inflation and a gold rally

As 2011 ended, the stage was set for a rally in precious metals in 2012. So far in 2012 we have seen major jumps in the price for gold. With Europe's finances still a main concern as well as inflation in the US, gold is expected to do well in 2012.

Bill Fleckenstein, MSN Money
1/6/2012 11:57 AM ET
MSN Money

Though 2011 was a poor (if not horrible) year for most investors in most markets, 2012 started off fairly strong for European and U.S. stocks early in the week. (Europe's bond markets, though, were largely unchanged Monday and Tuesday, after a decent amount of motion to close out 2011; they weakened as the week wore on.)

Meanwhile, the faltering euro did not precipitate enormous weakness in other currencies, though there was a bit of that. (The logic was that if the euro is weak then the dollar is strong, in which case you're supposed to sell everything except dollars. At least that is the current conventional wisdom, even though it doesn't make much sense.)

Out with the old, up with the new

I'm sure precious-metals bulls were extraordinarily frustrated late in 2011, as gold and silver were sold regardless of the news. Certainly markets can be maddening as well as unprofitable at times, especially at the end of the year, when forced selling (or, in some years, herd-driven buying) causes the markets to ignore favorable news. Selling sometimes feeds on itself.

Of course, when a trend is as powerful as the recent decline in gold was, I'm sure there were computerized trading programs jumping on the bandwagon as well, and betting on lower prices by getting short.

In any event, as the year ended, the stage was set for a potent rally in the metals, and that was what I think we saw starting on Tuesday. The questions now are whether the last week of December was the low for this entire decline, and whether we get some sort of test of those prices (as well as what such a test might look like).

Since so many people trade gold on a technical basis, the determining factor for what the next pullback looks like may be dictated by whether it can get over its 200-day moving average, at around $1,625 per ounce. I don't have a strong opinion at this point -- it would be almost impossible to have one yet. But it is entirely conceivable, given the forced liquidation and computer activity, that the lows for this correction have been seen.

No home-field advantage

Turning to the world at large, while the market "wrote the news" in the last couple of weeks (and the last couple of months) of the year, and the Standard & Poor's 500 Index ($INX +0.23%)rallied, folks seemed to get quite giddy over the possibility of potential strength in the U.S. economy. I think those expectations are misplaced. I don't think our economy is all that strong. It may not be the disaster that Europe's is, but I expect those looking for economic strength here will be disappointed.

Be that as it may, the U.S. is not the major focus of the markets at the moment anyway. That honor goes to the continuing saga of Europe's financial situation. On that score, as folks have had time to think about what the European Central Bank is up to and to look at its balance sheet, it is clear that the ECB has embarked on a money-printing mission, even though it refuses to call its actions that. (Basically, "long-term refinancing operation" is European for "quantitative easing.")

What we don't know yet is how successful the effort may be, if the worst has been seen in the European crisis, or if it is (more likely) about to deteriorate immediately.

That's why they call it the bull's eye

On Thursday, James Bullard, the president and CEO of the Federal Reserve Bank of St. Louis, said on Bloomberg radio that the Fed was "very close" to its inflation target, and that the Fed could officially adopt an inflation target in 2012.

Now I ask you, if the Fed picks an inflation rate to target, knowing the government is doing the calculating and what a complete joke the Consumer Price Index is at capturing the true cost of living, is there any doubt how this experiment is going to end? Do people really think that while the Fed has a printing press, the inflation rate has any chance of having a minus sign in front of it (i.e., we would see deflation)?

As I have said many times, central banks the world over mean to print however much money it takes to avoid anything remotely approaching a declining cost of living, with only the Europeans being unwilling to stand up and say that is exactly what their goal is. Thus, the long-term outcome is not in doubt, although the short-term twists and turns are, as always.

So for Europe, the saga continues. Will the eurozone crack up before the European Central Bank panics, or will the ECB panic first (even more than it already has)? We will just have to see, but in the end, all roads lead to money printing, debased currencies and inflation until the printing press is taken away.

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