Answers to Your Questions: A Path to Economic Disaster?

I always enjoy hearing from you and your fellow readers of Investor Brief. Although I can’t respond to each and every one personally, I will try to answer a few from time to time here on the blog. Let’s start with this one from Robert:

Maria, I'd love to hear your comments on purchasing gold, silver, or their respective mining companies. We are printing entirely too much cash without anything to back it up except more paper. This has historically been a proven path to economic disaster. – Robert M.

A good question. Thank you, Robert. I expect us to be talking about this for the foreseeable future.

I look at it this way: Investing in gold and commodities is often a hedge, so I think you have to look at it relative to some of the other happenings right now, like the falling dollar and worries about an economic recovery.

When people are worried, I think they want to buy something that's tangible, that they can hold and feel. And that's partly why you've seen the strength in gold and other commodities. The other reason is that it's a technical reaction to the dollar’s weakness.

But let’s take it up a notch. I think that the so-called “inflation trade” — the commodities trade — is a very important trend. On a near-term basis, you could argue whether or not the move has been too fast and whether or not it's gotten ahead of itself.

One of the most respected commodity investors on the planet, Jim Rogers, told me not long ago that he wouldn’t buy gold at record highs — because he doesn’t like to buy anything at record highs — but that he expects it to go higher over the long term. (You can watch the interview here.)

From a technical perspective, Jordan Kotick, Global Head of Technical Analysis at Barclays, made a bullish call on gold a couple of months ago. Silver has also been on the rise in recent months, which he also expected as he watched the gold-to-silver ratio, as you’ll see here.

Over the long term, you're talking about a very substantial and powerful trend: Thirsty economies around the world are going to need all sorts of raw materials, and the resource-rich countries are going to benefit from that, whether they produce copper, steel, iron ore, gold, silver or any other sought-after commodity.

I think this trend will remain in place for a long time. Just last week, China, the world’s biggest consumer of metals, announced that industrial production increased more than 16 percent to a 19-month high.

We will be talking much more about this trend in the coming months, including in the next issue of my Wall Street newsletter. We’ll look back at some of the biggest happenings of 2009, and the inflation trade and commodities certainly fall into that category. Stay tuned.

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