HOT OR NOT? Just like the infamous website where voters determine if you are “hot” or “not”...inflation seems to be in the crosshairs with no answer in store just yet. Bonds and home loan rates have been worsening over the past several months based on the fears that inflation is indeed heating up. But they did gain some improvement early last week on news that inflation from wages was softening. The 3rd Quarter Productivity Report showed the headline productivity number surged to a 4.7% annual rate – hotter than expectations and the fastest rate in two years – which would seem to be bad news for Bonds and rates. But Traders noticed that the report also showed Unit Labor Costs, a measure of wage inflation, actually declined. In fact, Unit Labor Costs have increased only minimally in the past year, showing reduced wage-based inflationary pressures...and Bonds reacted very favorably to this signal that perhaps inflation is not as “hot” as feared.

But Friday brought a super hot Consumer Confidence number, sucking the wind back out of the sails, and causing home loan rates to worsen slightly...close to where the week began. Yet lots of important news on inflation is due in the days ahead, including the Fed meeting where Greenspan, Bernanke and their team of inflation-fighters may give some clues in the Policy Statement.

GOLD IS ON A RIDE HIGHER – WHY? BECAUSE, BECAUSE, BECAUSE, BECAUSE, BECAAAAUUUUUSE...BECAUSE OF THE WONDERFUL THINGS IT DOES...FOR INVESTORS WHO ARE LOOKING TO PROTECT THEMSELVES FROM INFLATION. BUT DID YOU KNOW THAT THE DEBATE ABOUT THE US MONETARY GOLD STANDARD IS THE REAL STORY BEHIND THE “WIZARD OF OZ” MOVIE? IT’S AN INTERESTING SCOOP TO BRING TO YOUR HOLIDAY GATHERINGS THIS MONTH...SO DON’T MISS THIS WEEK’S INTRIGUING MORTGAGE MARKET VIEW.

The week ahead will definitely turn up the heat on Mortgage Bonds and home loan rates, with a full economic calendar of reports and a Fed meeting to boot. Check out the chart below, which shows how Bonds and home loan rates have worsened significantly since September, but the ugly decline has slowed somewhat over the past several weeks. Bonds are now trading within the range defined in yellow below, with home loan rates moving up and down by no more than .125% in recent days. But remember that strong or inflationary economic news tends to be bad for Bonds and home loan rates, while weak economic reports tend to benefit Bonds and rates. So looking at the chart below...it’s likely that Bonds and home loan rates will continue to trend in their present range until a significant enough news catalyst comes along, causing it to pop one way or the other.

And this week’s full slate of economic news could very well create the volatility needed to kick pricing right out of this range. The week holds lots of juice, including Tuesday’s Fed Meeting and Policy Statement. Another .25% hike to the Fed Funds Rate is a lock, and the highly analyzed policy statement is unlikely to change significantly considering all the recent data showing strong growth. Retail Sales data will also be in the mix, but the most influential Bond market mover could be the Consumer Price Index inflation data.

Bottom line...fasten your seat belts for an action packed week ahead. More hot reports of inflation will spell bad news for Bonds and home loan rates.

Follow the Yellow Brick Road, follow the Yellow Brick Road...and follow the price of gold to a 25-year high at $530 per ounce!

With heightened concerns about inflation – due in part to rising oil prices – many investors are choosing to put their money in gold. Looking back over time, history has proven that gold stands up to inflation. Back in the 1970’s when serious inflation took hold of the United States economy; gold prices shot higher and rewarded those who invested in gold.

Let’s go back about 100 years ago when the US was on the “Gold Standard”, meaning our paper currency was backed by actual gold reserves. It was believed that gold was scarce, which continually drove the price higher. This created great hardships for farmers of that era. Farmers would borrow money for seed, but by the time they were able to harvest, the rising price of gold made it much more costly to pay back the bankers. Farmers were struggling.

The hardship many farmers experienced sparked the formation of the Populist Party, who wanted the US to go off the Gold Standard and onto a “bimetallic” standard of gold and silver. Since silver was more plentiful, the idea was that prices would not rise as fast. This would allow farmers to repay Banks for their seed money without the huge additional cost for the increase in currency.

The most memorable work of literature to come from the debate over gold and silver in the United States is "The Wonderful Wizard of Oz," published in 1900 by L. Frank Baum. That’s right, many think that the “Wizard of Oz” is a children’s story. But the reality is that the story is about gold and the struggle to get off the Gold Standard and onto a bimetallic standard. In fact, OZ or the letters O and Z are the abbreviation for ounce, as in ounce of gold.

The characters and items in the tale have a very symbolic meaning associated with the Populist period. Baum summarized the monetary debate through a charming story about a naive girl from Kansas – Dorothy, who represented the average American citizen. Baum based Dorothy's character on the outspoken Populist Leslie Kelsey, known as the “Kansas Tornado."

On Dorothy's journey down the yellow brick road, which represented the gold standard, Dorothy meets the Scarecrow, the Tin Man, and the Cowardly Lion. The Scarecrow represented Midwestern farmers that did not possess the intelligence needed to look out for their own best interests; the Tin Man represented the American factory worker that had become heartless through industrial labor; and the Cowardly Lion represented William Jennings Bryan, the failed Populist Leader. Bryan lost three presidential elections as key supporter of the Populist movement for the bimetallic monetary standard.

When they reached the Emerald City, the Wizard represented the McKinley administration, which appeared “all knowing” as they pulled strings behind a curtain, but were truly powerless to help the people. The Wicked Witch of the East represented the eastern banks that farmers borrowed from.

Once the Wizard was exposed and the Wicked Witch defeated, the Scarecrow or farmers were enlightened, the Tin Man or factory workers more empathetic, and the Lion or Populist Leadership were empowered. Even the Tin Man’s axe was made of both gold and silver...the harmonious blending of the two metals.

But Dorothy still needed to get home. She was able to do this by using her silver slippers, which she had acquired near the beginning of her long journey. Yes, the 1939 MGM movie used Ruby Red slippers for dramatic and colorful effect, but the original slippers in the book were silver. So the answer was in her hands all along...silver! Mr. Baum wanted to creatively make his point that using silver was the answer.

Although Frank Baum, William Jennings Bryan and the Populist Party tried, the US remained on the Gold Standard. However, a few years later, large gold deposits were discovered, which alleviated the pressure on prices.

Today, increasing gold prices can signal that investors are concerned about inflation. But don’t look for a wizard or magic slippers to fix it. The Fed will raise rates Tuesday and again in January to help keep inflation under control.

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of December 12 – December 16