Paul: Is gold a good hedge against inflation? Do you see inflation picking up as the government spends Ts?

Generally commodities are considered as good hedges against inflation. Gold is definitely one of those commodities.

I must caution you though that not all commodities are inflation hedges. Only those commodities that have the following two characteristics are inflation hedges.

1) Commodity should be “storable”. Gold, industrial metals, precious metals etc. can be stored. Agricultural products such as perishables (corn, wheat) can not be stored for too long and thus are not good inflation hedges.

2) Commodity’s demand should be relatively constant even in the face of rising/falling supply. The idea is that a steady demand will result in ability to pass on the rising costs to the consumer. Commodity with a seasonal demand is not a good hedge, e.g. heating oil. Heating oil’s demand goes up during winter time but the producers build up huge supply balancing out the two.

Government is definitely issuing a lot of Treasuries to finance its TARP/TALF and all other kinds spending programs designed to kick start the economy. What I suspect is that foreign investors, such as China and Japan, might get increasingly concerned about their Treasury investments and stop buying more Treasuries.

This shunning of Treasuries might devalue the dollar, raising the price of imported good and putting an overall upward price pressure on all goods and services in the US.

So, I do see some inflationary environment due to continued selling by the Treasury and accompanying deficit concerns.