Gold Won't Get Fed By Food Price Jump As Inflationary Effect Limited
August 2010, 10:33 a.m.
By Debbie Carlson
Of Kitco News
-- (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.
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.
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.
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.
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.
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.”
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.
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.
wheat’s rally from mid-June to early August, gold prices
actually fell a little more than 3%, showing no correlation.
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
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.
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%.
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.
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.