So, the word on the street—both Wall Street and Main Street—is that the rally is over for gold and other hard assets. It’s time to look elsewhere for increasing value, right? Actually, we believe the recent sell off is a blip rather than a reversal of a trend, one which will provide an entry point for those who are paying attention.

Wall Street pundits are cheering last week’s $100 sell off in the price of gold, and investors have turned their back on the gold miners, betting on their downfall. Short interest is up 16% for ABX, 22.2% for AEM and 22.4% for GG between the end of February and mid-March.

But here’s the problem with this premature requiem for gold: it presumes that the cause of falling gold prices is a change in monetary policy and the start of a bull market in the US dollar. That’s a wonderful scenario but not one supported by other events creating pressure on the economy.

First, there’s the Fed’s 75-basis point cut in a single meeting last week. That’s hardly a hawkish move for the dollar. In fact, the Federal Reserve is quickly closing in on the fed funds rate that originally precipitated the commodities rally in the early part of the decade.

Then there is the lending expansion by Government Sponsored Enterprises FHA, FNM, FRE and FHL. Easing of capital requirements and bond purchasing rules for these entities will add around $350 billion to lending capacity.

Let’s face reality: moves by the Fed and GSEs to take bad debt off banks’ balance sheets don’t improve the quality of the underlying assets. Losses will eventually become the responsibility of taxpayers—yet another burden for all of us to carry.

Are we hearing the sounds of more money creation? The eventual sound of the dollar slipping yet further vs. gold and commodities? That’s what I hear, despite the earplugs the Fed and the stock market seem to be wearing.

The recent sell-off in metal was due in part to hedge fund/fast money selling, yet keep in mind that gold is still up approximately 10% for 2008 and up more than 35% over the past 12 months.

I just can’t see what has changed about the fundamental backdrop for gold.  A great investment in recent years, we think gold will continue to trend upward once this short-term selling abates.

I discuss this rate cutting nonsense, the pullback in gold and more in my new podcast, the Mid-Week Reality Check.  Five minutes of sanity in an insane financial world!

Michael Pento
Senior Market Strategist
Delta Global Advisors
800-485-1220
www.deltaga.com