The Fed Wants Inflation
Yesterday, the Fed said it was prepared to move on new stimulus if the economy weakens further. What's more, the Fed's statement that inflation is below levels it wants to see suggests that further easing is coming. That's a clear indication that the Fed is still worried about deflation.
I suppose it's a good sign that the Fed held off on new easing action. But the Fed also failed to sound a confident tone about the economic recovery, which I think is mistake.
Of course, we know the economy isn't great. But most economic data has improved over the last month or so. And it should be understood that there is no magic bullet that puts millions of Americans back to work. It's going to take time, re-training and probably some government incentives.
Still, the Fed seems to be simply reacting to data, instead of getting ahead of the economy providing some leadership. That may not be part of the Fed's mandate, but it should be clear that the economy needs some leadership.
One unmistakable consequence of the Fed's statement is the continued rally for gold. Gold is the ultimate safe-haven right now. Investors buy it on deflation concerns and inflation concerns. And with the Fed essentially saying it wants more inflation, gold is off to the races. The yellow metal could take out $1300 an ounce today.
I'm sure the rally in gold prices hasn't escaped your notice. I hope it hasn't escaped you investment dollars. Because another 10%-20% move for gold prices is by no means out of the question.
One aspect to gold's rally that may have escaped your notice is the gold miners. One might think that higher gold prices would automatically translate to higher profits, and stock prices, for the gold miners.
Prices are essentially fixed for gold miners. Labor costs don't rise 2% overnight just because gold prices do. And while gold companies can't take advantage of every price swing, the sustained rally for gold prices means that miners are getting ever higher sale prices for the gold they pull out of the ground. And that's going to lead to higher profits.
So farthis year, gold mining stocks have more or less moved in lockstep with gold prices. That may seem logical, but really, miners should outperform gold prices because their profits can grow at a much faster rate as gold prices move higher.
Part of the reason that gold mining stocks haven't moved significantly higher as gold prices launch is that investors have been unsure whether gold can sustain its lofty levels and even move higher.
But the recent open-ended statement by the Fed is a pretty clear signal that gold prices can, and almost certainly will, continue to move higher.
Gold mining stocks have just started to outpace gold prices as of the last week of August. And when you see that some of the top gold mining stocks carry forward P/Es of 14, 18 and 20, it's easy to see how these stock can move much higher.
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As always, let me know what you're thinking: dailyprofit@wyattresearch.com.
