While the recent rash of government spending hasn't propelled gold prices to new highs, it has contributed to a decline in US dollar.
Having reached a high of 89.70 less than two months after President Obama took office, the dollar index has since pulled back to around the 80.00 level. It could easily be lower, but because it's measured against a basket of other currencies, the price is relative.
For example, the euro makes up about 60% of the dollar index weighting, since there are 16 nations using Europe's single currency. And because Europe is also battling fiscal problems, in addition to Japan and Britain (whose currencies are also weighed against the dollar), the greenback has held its ground.
Most of the time, a weaker dollar will cause gold prices to rise, while a stronger dollar usually sees gold decline.
Add in the prospect of inflation (or hyper-inflation) at some point and the scene is set for gold to potentially make new, all-time highs.
Except we're not even close to that point yet. Inflation is nowhere to be found - as evidenced by the Consumer Price Index falling by 1.3% in the 12 months through May. That was the largest drop in 50 years.
So how do we play gold in the short-term?
Don't blindly follow the crowd into gold
The main reason why the gold market concerns me at the moment is that despite almost everyone being bullish, the metal hasn't been able to set new highs.
The long side is crowded with bulls, just like the technology sector was back in 1999. And we all know how that turned out.
That said, the gold market is much different than the tech sector. I believe every investor should have some gold or another precious metal in his or her portfolio… but there's a better way to do it than by simply buying it outright at the moment.
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