Staying Long Gold... But Getting Nervous

After months and months of higher highs in gold, the past sessions have given investors an example of how vicious the downside in commodities can be. After hitting a new all-time high last Thursday, gold has now sold off for three straight sessions.

The long trade on gold is simple. With central banks in the U.S. and around the world easier than they've been in decades, inflation will hit and hit hard and when it does gold will trade higher. In addition, with the instability of the U.S. dollar as the world's currency, gold is the only reasonable alternative as a replacement and central banks are diversity reverses into gold - creating a natural support for the price.

But while inflation seems like a logical event, the simple fact is that we've not seen it. In fact, signs of deflation are easier to find.

Today for example, Kroger (NYSE: KR), the countries largest grocer, said they are seeing food deflation. Many have been looking at Kroger as an alternative way to play inflation on rising costs, but instead food price deflation contributed to an earnings miss and lower guidance from the company.

On its conference call today, Kroger said, "We have deflation in sales, making expense leverage difficult; a sharply more competitive environment that is now wide-spread; and cautious consumers... For the second consecutive quarter deflation accelerated in most grocery categories. Last year at this time we had estimated inflation of 6%. This year we estimate deflation to be minus 0.8%, or nearly 700 basis points swing year-over-year."

This data is not a recipe for inflation. Deflation is prevalent and continues to be. If food inflation hasn't hit yet, will it ever?

It seems that no matter how much the Fed prints, or how many markets they support, inflation will not show its face. As more and more data points like this come to light, the long gold trade becomes harder and harder to support.

But for now, I'm sticking with my long gold trade, a position I've held since the Fall of 2008 though ETF SPDR Gold Shares (NYSE: GLD). My reasoning is that the government will press their bets. Hey if they can bring us back from the brink of depression with ballooning deficits, supporting markets, bailing out companies and the easy money policies - why not keep the same policies in place so we can return to growth and create jobs? It is all too tempting. They will press their bets and with it inflation will come.

Lon Juricic - President StreetInsider.com

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