Here's a big picture chart of what happens to paper money over time.

http://www.bigpicturespeculatorblog.com/2005/12/marc_fabers_lat.html

Gold's recent rise has been with the headwinds of a $USD rally. If the $USD rally is indeed over, this will support the price of gold.

When prices go exponential (the price curve becomes very steep, going almost vertical like they are now with the metals), expectations grow that the price will fall in the same manner.

If the $USD falls, the gold pullback off of an exponential rise may not be severe. Maybe the price pattern would be a bullish flag pattern with a sideways consolidation to work off the momentum. Would an expert in Technical Analysis like to chime in here?

Back to the $USD/Gold parallel rally. The $USD rally is due to the rising of interest rates in the US. The last few years, this has been enough to depress the price of gold. It is not anymore. Traders must be realizing that the Fed is behind the curve just like in the 1970's where gold rose in the face of rising interest rates. The actions of the Treasury are inflationary and are counteracting the Fed's actions. The market is telling us that it's too little too late.

I guess bonds are going lower over time.

OT Another seasoned trader, Stephen Vita expresses his confidence in Wall Street strategist (not) and independent research this morning:

"Davis, Desmond, Leuthold, Barnes and Dorsey.......Far From The Madding Crowd

Those gentleman noted above -- Ned Davis(Ned Davis Research), Paul Desmond (Lowry's), Steve Leuthold(Leuthold-Weeden), Martin Barnes (BCA Research) and Woodrow Dorsey (Market Semiotics) -- have a great advantage over the Chiclet-Toothed Smell-Side Stra-Tee-Gerists.

You see, they are essentially free of the wrenching, twisted, commission-driven conflicts of those Street people

Something else........they are all essentially Bearish about Equity market prospects going foward into 2006, a sharp contrast to the bullishness of the Poseurs who have a median prediction of a 9% gain for 2006."

Stephen Vita's site is subscription based now: http://www.alchemyoftrading.com/default.aspx

This commentary from BCA Research seems to be forecasting low inflation in 2006.
U.S. Market Betting On Good Growth, Low Inflation
12:29:00, December 07, 2005

http://www.bcaresearch.com/public/story.asp?pre=PRE-20051207.GIF

Anyone care to comment?

davpac-

They are not alone in their view. BCA and Don Coxe are two that have been bullish (and correct) on commodities (energy, metals) while seeing mixed inflation data. While the industrialization of China and India are inflating these commodities they are at the same time 'exporting low wages'. So while raw material cost rise real wages in the industrialized world are declining. The sanguine outlook at BCA also is based on their view of a slowing economy in 2006.

Here's a nice long term chart showing how US paper money has been holding up.

http://www.bigpicturespeculatorblog.com/2005/12/marc_fabers_lat.html

Bill nails the point down- this game is about making money, period.

Gold has been very good to me. But, with a total allocation of 20% (gold+metal sector at market) I have to make a choice. Either scale out of some gold to reduce my exposure or hedge. If I am going to hedge with long dated treasuries (I am) I try to understand the bull case for that asset and determine what consensus view are.

I currently hold a 10% allocation to long dated treasuries. I believe my worse case for bonds would result in relatively small capital loss; while that same worse case could result in outsized gains in the gold. On the other hand if gold is getting overbought and trades down on CPI surprising to the downside in 2006 (as BCA suggest) or due to a sudden drop in M3 growth in 1Q 2006) as Coxe implies then bonds could catch a bid and help cushion the hit I take on the gold.

Best case for gold and bonds could result of we tumble into recession and confidence caves. Both could benefit.

stockman makes a great point with a great comment. You don't have to hedge your gold gains with puts on the security. Bonds will perform well if we move towards deflation.

My portfolio consists of 27% GLD and gold shares (with a lot of gains in that 27%). I also own stocks, bonds and cash. Each of these asset classes will do well in different environments and that's my strategy. The key is rebalancing in a timely manner.

My bond allocation has a duration of just over 2 years which, quite frankly, is not going to give me the deflationary protection that the bonds in my portfolio are intended to do. The short duration has worked well since the summer, but leaves me exposed to making a mistake by getting cocky and greedy regarding gold. So, I also am currently looking at adding long bonds versus directly selling or hedging my gold.

g034/stockman-
This thinking presumes a long term intent to hold gold and a tolerance for any near term correction even if sizeable, correct? That would imply your basis in the bullion and miners is very low, perhaps achieved (along with Bill!) at May lows or prior. Unfortunately I am not so lucky although I did get most of my positions in the October correction. Otherwise hedging with something so non-correlated would be puzzling to me.