Written by Nate White, Chief Investment Officer of Paragon Wealth Management.

Could gold, the traditional and popular hedge against
inflation, actually perform poorly during an inflationary period thereby
frustrating its use as a hedge?  For years now many have been worried that
due to unprecedented central bank easing and huge government deficits we should
be experiencing high inflation.  Instead, with the CPI at 1.6% inflation
is benign at best.  We can “thank” the financial crisis for that.

The price of gold seemed to confirm inflation worries by having
a stellar decade long run from $300/ounce in 2001 to over $1,800 by August of
2011.  Since then, the price of gold has stalled.  Perhaps gold moved
up less because of inflation worries and more because it was a recipient of the
money issuing forth from the central bankers?  Now in anticipation that
the easy money policies could start to end within a year or two could this be
the reason that gold prices are stalling out?

What is equally interesting to me is that now as the economy
is starting to strengthen somewhat as it leaves the financial crisis behind we
could actually be on the cusp of inflation starting to pick up.  As
confidence returns, the massive reserves in the banking system could finally
start to move out into the economy as lenders open up and demand for credit

Productivity and margins are strong in corporate America and
at this stage of the economic cycle as demand picks up they will have to hire
more workers to keep up with sales.  This would result in the wage
inflation that the Fed likes to focus on.  However, as inflation picks up
and the Fed finally has to start reining in the money supply gold could
actually decrease.  It would be the opposite of what happened over the
past decade.  Just as stocks often price in all of the good news perhaps
gold has done the same in regards to inflation?  Asset prices love to move
ahead of the actual events.  Perhaps it is a good time for gold investors
to lock in some gains if they were using it as a hedge against inflation.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.