Hackett Advisors in the News

Gold Won't Get Fed By Food Price Jump As Inflationary Effect Limited

19 August 2010, 10:33 a.m.
By Debbie Carlson
Of Kitco News

Chicago -- (Kitco News) --Sharp rises in some food commodity prices this summer has raised thoughts that this could spark inflation and could help inflation-sensitive commodities like gold, but market watchers said this isn’t a sound reason to buy gold.

Wheat prices rose to their highest levels in two years on a severe drought in Russia and surrounding countries, destroying cereal crops there, prompting Russia to ban the export of wheat. The gains in wheat also lifted prices for other grains. Sugar prices have also rallied sharply this summer, in part due to Russia’s drought affecting sugar beets.

But market watchers said the circumstances that raised prices and stoked concerns of inflation are sector-specific. This situation won’t spread beyond food and hobble a shaky global economy, they said. This is not the 1970s and it’s not even the same situation as 2008 when food prices rallied and riots broke out in some poorer countries.

And while gold prices have been rising lately, they point out that gold was unusually sluggish while these food commodities saw their stoutest rise, suggesting that gold wasn’t reacting to potential inflation concerns.

“I think it's a stretch for gold to catch the effect of rising food inflation fears. Today, through ETF's such as DBA or even CORN, there are more direct plays enabling investor's to get exposure,” said Ken Morrison, founder of online newsletter Morrison on the Markets.

Spencer Patton, president and founder of Steel Vine Investments said while wheat has a spillover effect to other food staples like corn, oats and soybeans, “one would be hard pressed to tie droughts in Russia to inflation and therefore a rise in gold prices.”

Shawn Hackett, president of Hackett Financial Advisors, said there’s a difference between inflation as a general condition and specific, targeted inflation due to supply disruptions. “This (rally in wheat) is not systemic inflation. In the 1970s we had general inflation, problems with an over-stimulated monetary policy and rapid velocity of money,” he said.

Although wheat prices rose 71% from their summer low in June to the recent high in early August, Hackett said that is nowhere near where prices were during the food crisis of 2008. Furthermore, other countries like the U.S. have plenty of wheat supplies and can make up the Russian shortfall. Since making that high, wheat prices have fallen 16% and continue to erode.

During wheat’s rally from mid-June to early August, gold prices actually fell a little more than 3%, showing no correlation.

Morrison said the market that will likely be most affected by the grain rally is the one that uses grain the most – livestock. High feed costs will erase livestock feeders profitability.

Further, other market watchers said given fragility of the current global economy its unlikely food processors would be able to pass on much of higher grain costs to consumers. They’re likely to have to eat the costs, which would limit the impact of food inflation spreading.

Hackett said there are other reasons to buy gold. He believes the U.S. economy is headed to a deflationary period, with the tipping point being the revision to the second quarter U.S. gross domestic product report set for release Aug. 27. Originally U.S. GDP was estimated at 2.4%, but Hackett believes it could be revised closer to 1.5%. A MarketWatch consensus poll suggests it could come in around 1.3%.

If that’s the case, a slowing economy could give the Federal Reserve a reason to push other quantitative easing measures despite the unpopularity of more government spending. “They see what’s coming. The previous stimulus plan has run out of effectiveness,” Hackett said.

Because that action takes time to work into the markets and the economy the effect of that extra money supply might not be felt until early 2011 which is why buying gold toward the end of this year would allow an investor to benefit from any rallies that could come next year.


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