Gold @ $1000

Gold's been the go to trade as of late. Most say it's because gold is an inflation hedge. This group of thinkers hold that with the amount of fiscal and monetary stimulus the federal government has dumped into the economy that inflation is just around the corner. The other major faction says that gold is rising above $1000 because it's becoming more valuable against most major paper currencies. This group contends that the Fed and the Obama administration have taken on dollar-negative policies. Either way, the gold bugs are excited.

I think, however, the reality is somewhat more complicated. What we don't hear too often in the media is the concept of the "velocity of money." This is a nuanced concept and I am not prepared to explain it in detail. However, simply stated, it describes the rate at which money in circulation is used for purchasing goods and services. What's happening now is that the velocity is not growing. Because of this, the Fed will continue to print money as long as they think deflation could be a problem. How much more? No one knows. Chances are the Fed will supply more money than is required at some point.

Of course, all this is speculation as the ultimate outcome can only come after the fact. There are so many variables in play that it is impossible to pinpoint with any accuracy. Because the velocity of money is not growing/slowing, I believe we will be in a period of deflation for the next few quarters (bad for gold) before we enter inflation then stagflation (good for gold) to end this massive financial bubble. Gold will experience a roller coaster ride, so it will test your resolve if you hold in the meantime.