Best of the Week
Most Popular
1. Crude Oil and Water: How Climate Change is Threatening our Two Most Precious Commodities - Richard_Mills
2.The Potential $54 Trillion Cost Of The Fed's Planned Interest Rate Increases - Dan_Amerman
3.Best Cash ISA Savings for Rising UK Interest Rates and High Inflation - March 2018 - Nadeem_Walayat
4.Fed Interest Hikes, US Dollar, and Gold - Zeal_LLC
5.What Happens Next after February’s Stock Market Selloff - Troy_Bombardia
6.The 'Beast from the East' UK Extreme Snow Weather - Sheffield Day 2 - N_Walayat
7.Currencies Will Be ‘Flushed Down the Toilet’ Triggering a ‘Mad Rush into Gold’ - MoneyMetals
8.Significant Decline In Stocks On The Cards! -Enda_Glynn
9.Land Rover Discovery Sport Extreme Driving "Beast from the East" Snow Weather Test - N_Walayat
10.SILVER Large Specualtors Net Short Position 15 Year Anniversary - Clive_Maund
Last 7 days
Time To Eliminate Your Wall Street Tax? - 20th Mar 18
The Beast from the East Snow, UK Roads Driving Car Accidents - 20th Mar 18
Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - 19th Mar 18
2018 Reversal Dates for Gold, Silver and Gold Stocks - 19th Mar 18
This Tech Breakthrough Could Save The Electric Car Market - 19th Mar 18
Stocks Set to Open Lower, Should You Buy? - 19th Mar 18
The Wealth Machine That Rising Interest Rates Create Conflict With The National Debt - 19th Mar 18
Affiliate Marketing Tips and Network Recommendations - 19th Mar 18
Do Stocks Bull Market Tops Need Breadth Divergences? - 19th Mar 18
Doritos Instant £500 Win! Why Super Market Shelves are Empty - 19th Mar 18
Bonds, Inflation & the Market Amigos - 19th Mar 18
US Housing Real Estate Market and Banking Pressures Are Building - 19th Mar 18
Stock Market Bulls Last Stand? - 18th Mar 18
Putin Flip-Flops Like A Drunken Whore On Bitcoin Cryptocurrency Legalization - 18th Mar 18
How to Legally Manipulate Interest Rates - 18th Mar 18
Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - 18th Mar 18
Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - 17th Mar 18
Strong Earnings Growth is Bullish for Stocks - 17th Mar 18
The War on the Post Office - 17th Mar 18
GDX Gold Mining Stocks Fundamentals - 16th Mar 18
Nationalism, Not the Russians, got Trump Elected - 16th Mar 18
Has Bitcoin Bought It? - 16th Mar 18
Crude Oil Price – Who Wants the Triangle? - 16th Mar 18
PayPal Cease Trading Crypto Currency Bitcoin Warning Email Sophisticated Fake Scam? - 16th Mar 18
EUR/USD – Something Old, Something New and… Something Blue - 16th Mar 18
DasCoin: A 5-Minute Guide to How It Works - 15th Mar 18
Stock Market Downward Pressure Mounting - 15th Mar 18
The Stock Market Trend is Your Friend ’til the Very End - 15th Mar 18
6 Easy Ways to Get What Women Want, for Less! - 15th Mar 18
This Isn’t Your Grandfather’s (1960s) Inflation Scare - 15th Mar 18
Eye Opening Stock Market Index, Volatility, Charts and Predictions - 15th Mar 18
Gold Cup At Cheltenham – Gold Is For Winners, Not For Gamblers - 15th Mar 18
Upcoming Turnaround in Gold - 14th Mar 18
Will the Stock Market Make Another Correction this Year? - 14th Mar 18
4 Ways To Writing An Interesting Education Research Paper - 14th Mar 18
China Toward Sustainable Economic Growth - 14th Mar 18
Stock Market Direction Is No Longer Important - 14th Mar 18
Trade Tariffs Defeat Globalists and Return Prosperity - 14th Mar 18
Stock Market Crash is Underway and Cannot be Stopped! - 14th Mar 18
Are Energy Sector Stocks Bottoming? - 14th Mar 18
Nasdaq Stocks Soars to New Record High After Strong Job Reports - 14th Mar 18
Bitcoin BTCUSD Elliott Wave View Calling for Rally toward $15,000 - 13th Mar 18
Hungary’s Gold Repatriation Adds To Growing Protest Against US Dollar Hegemony - 13th Mar 18
Record Low Volatility in Precious Metals and What it Means - 13th Mar 18
Tips for Writing and Assembling the Classification Essay - 13th Mar 18
Gerald Celente "If Rates go up too High, the Economy goes Down, End of Story" - 13th Mar 18
Stock Market Selloff Showed Gold Can Reduce Portfolio Risk  - 13th Mar 18
Silver Does it Again! Severe Consequences - 12th Mar 18
Has the Stock Market Rally Run Out of Steam? - 12th Mar 18
S&P 500 at 2,800 Again, Stock Market Breakout or Fakeout? - 12th Mar 18
The No.1 Energy Stock To Buy Right Now - 12th Mar 18
What Happens Next When Stock Market Investor Sentiment is Neutral - 12th Mar 18
Economic Pressures To Driving Gold and Silver Prices Higher Long-Term - 12th Mar 18
Labour Sheffield City Councils Secret Plan to Fell 50% of Street Trees Exposed! - 12th Mar 18

Market Oracle FREE Newsletter

Urgent Stock Market Message

The printing press is running hot, but where is inflation and how will it affect gold?

Commodities / Gold and Silver 2012 Sep 06, 2012 - 02:48 AM GMT

By: GoldSilverWorlds


Best Financial Markets Analysis ArticleThe key to understanding inflation lies in the implications of an increasing money supply. Here at Global Gold, we rely on the “True Money Supply” which is provided by the Mises Institute. The “True Money Supply” was originated by Murray Rothbard and represents the amount of money in the US economy that is available for immediate use in exchange. On the chart below you see that the True Money Supply has accelerated at a faster rate in the past couple of years; it is currently in an exponential growth phase. Even if one takes the official data published by the US Fed, the evolution looks similar: since 2000, the Fed balance sheet has increased fivefold.

What are the implications of the hugely increased money supply for inflation? The Austrian School of Economics defines inflation as the expansion of the money supply, whereas rising prices denotes the increase in the general price level. If the supply of a given good increases (in our case it’s “money”), one unit of the same good loses some of its value. That devaluation of money results in rising prices. Note that in spoken language inflation tends to be associated with consumer prices, which can lead to confusion.

Inflation is the root cause of the devaluation of money, whereas price increases are just the result of inflation. In the years leading up to the financial crisis, we had official inflation rates between 2 and 4%. At the same time however, the US was importing an increasing number of goods from low cost producer China. This should have lead to a decrease in the price level. But due to the increase in money supply, prices kept rising. This implies that the USD has lost much more than 2 to 4% of its value in real terms per year.

So why don’t we see rising prices, although inflation is already here?
First, we should note that we believe inflation (as calculated by governmental entities) is manipulated in order to hide the currency devaluation. calculates inflation based on the “traditional” calculation methods. Based on those metrics, the inflation level in the US should be at least 5%. Even an inflation rate of 5% seems to be low for the amount of money that is being created.

Which reasons explain this phenomenon? We believe there are several reasons, the most important one being that the newly created money is not getting into circulation. Most of the fresh fiat-money has been used to bail-out the existing banking system. Even with these bailouts, the banking system is massively under-capitalized, so the huge amount of liquidity is not being lent out (to other banks, individuals or corporations). The liquidity is being horded and invested in “safe” assets. This is creating asset bubbles all over the world.

The biggest one of those asset bubbles are government bonds. Banks all over the world are investing in (read: inflating) treasury bills and government bonds. The perversion of the current bond prices becomes clear when you see people willing to lend out money to governments with a negative yield as a return. That’s unsustainable. I will not go into detail regarding the bubble in the stock market, but it should be noted that there has been a strong correlation between the quantitative easing measures of the US Fed and the strong equity price returns.

The channeling of liquidity into certain assets is keeping the “velocity” of money low. Velocity, which stands for the frequency with which a unit of money is spent in the economy, has collapsed since 2007. Back in 2001 every USD was turned over more than twice a year, today the number is down to only 1.5 times. That’s a decrease of almost 30%! Newly created money is not being circulated. You can be sure however that in the near future the velocity will go up again … and that will finally lead to enormous price rises.

Are there any triggers already visible that could spur the velocity of money?
Well, history tells us that you can’t control inflation over a long time. Somehow liquidity will inevitably come into the system, leading to sharp price increases. It will lead to a change in people’s perception as well. The shift on a large scale will come when people will finally lose their trust in paper money, which will only happen when they see its value declining and when they understand they beaome victim of it.

In my personal view, the next few years will be dominated especially in the western world by a declining real economy, higher unemployment rates, financial repression such as higher taxation, government restrictions when it comes to investment possibilities. Interest rates, which are kept artificially low, in combination with a moderate inflation rate, are leading to low or even negative real return on investments. That’s really destroying the existing wealth through the back-door, reducing the purchasing power of paper money / currencies.

It doesn’t matter that the velocity has been decreasing for more than a decade now, as clearly visible on the above chart. The central point is that history shows that velocity increases when people expect prices to go up in the near future. When that happens, it’s impossible to stop the move.

At that point in time, people everywhere are going to understand that paper money is worthless. They will rush into assets which have real value. That will be an incredible driver for real assets! History has shown that in hyperinflation scenarios people rush into precious metals. The coming collapse of our fiat currency system will be no different in my view, sooner or later gold and other precious metal prices are going to skyrocket. Again, history shows us that especially gold has outperformed any other asset classes in those kind of environments … because gold is money for more than 5000 years now.

Want to know more about this subject? Then download and read the white paper that was created by Global Gold and GoldSilverWorlds.

Source -

© 2012 Copyright goldsilverworlds - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2018 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules