Below are extracts from commentaries originally posted at www.speculative-investor.com on 23rd and 26th November 2006.

A reason we prefer gold

One reason we much prefer gold to all other commodities in the current environment is that gold tends to perform relatively well when real economic growth is slow, and slow, or no, real growth is a likely outcome as far as the coming year is concerned. Another reason is illustrated by the following long-term charts of the CPI-adjusted CRB Index and the CPI-adjusted gold price. The charts (minus our notations) are courtesy of the excellent www.fullermoney.com web site.

In our opinion, the relative 'real' performances of gold and the CRB Index during 1974-1980 constitute evidence that non-monetary commodities do not do well in an environment where inflation FEARS are out-pacing actual inflation (money-supply growth). Many non-monetary commodities have done well over the past few years and some, most notably the industrial metals, have out-performed gold by a wide margin, but that's because the past few years have been characterised by the combination of high inflation (high money-supply growth) and low inflation fears.

There's a good chance that at some point over the next few years inflation fears will begin to run ahead of actual inflation, leading to dramatic strength in gold (and perhaps silver) relative to most non-monetary commodities.

Something's gotta give

Gold looks like it is about to breakout to the upside and head back to around $700. Additionally, commodity prices look set to continue their post-October rebound for another 2-3 months. At the same time, bond futures are testing the multi-month highs reached in October and the following chart of the "Expected CPI" (the yield on a standard 10-year T-Note minus the yield on an inflation-protected 10-year T-Note) indicates that inflation expectations are languishing near 3-year lows.

If gold and commodity prices do what we expect them to do over the next 3 months then inflation expectations will ramp upward and the Fed will be forced to resume its rate-hiking early next year. It will be a self-reinforcing trend, with a rising gold price pushing inflation expectations upward and higher inflation expectations fueling a rise in the gold price. And if this happens it is unlikely that bond futures will move higher or remain near current elevated levels. In fact, if our short-term expectations for gold and commodity prices prove to be in the right ballpark then bond futures will most likely tank over the coming few months.

Something will therefore have to give in the near future. Either the nascent upward trends in the gold and commodity markets will have to come to abrupt ends, or bond futures will have to reverse sharply lower. Our money is clearly on the latter eventuality...