Best of the Week
Most Popular
1.BrExit House Prices Crash, Flat or Rally? UK Housing Market Affordability Crisis - Nadeem_Walayat
2.Stocks Bull Market Climbs Wall of Worry, Bubble? When Will it End? - Nadeem_Walayat
3.Gold Price Is Now On Its Way To All-Time Highs - Hubert_Moolman
4.Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - Harry_Dent
5.UK interest Rate PANIC CUT! As Banks Prepare to Steal Customer Deposits - Nadeem_Walayat
6.Gold and Silver Bull Phase 1 : Final Impulse Dead Ahead - Plunger
7.Central Bankers Fighting An Unprecedented Global Economic Slowdown - Gordon_T_Long
8.Putin Hacking Hillary for Trump, Russia's Manchurian Candidate? - Nadeem_Walayat
9.Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - Chris_Vermeulen
10.Gold Sector - Is it time to Back up the Truck? – Mortgage the Farm? - Peter_Degraaf
Free Silver
Last 7 days
Stock Market - All Is Calm, All Is Not Right - 27th Aug 16
Gold Junior Stocks Q2 2016 Fundamentals - 26th Aug 16
Buy Gold’s August Dip? Gold’s Monthly Sweet Spot In September - 26th Aug 16
The IMF’s Internal Audit Reveals Its Incompetence and Massive Rule Breaking - 26th Aug 16
Commodities Are the Best Bargain Now—Here’s What to Buy - 26th Aug 16
Why I Left Canada and Became A Citizen of the Dominican Republic - 26th Aug 16
The GLD vs GOLD - 26th Aug 16
Can Stocks Survive Without Stimulus? - 25th Aug 16
Why Putin Might Be on His Way Out - 25th Aug 16
Bond Guru Gary Shilling - The Bond Market Rally of a Lifetime - 25th Aug 16
A Zombie Financial System, Black Swans and a Gold Share Correction - 25th Aug 16
OPEC’s Output Freeze: What Has Changed Since Doha? - 25th Aug 16
Merkel Prepares For a Deliberate Crisis While White House Plans For a Disastrous Succession - 24th Aug 16
Suspicious Reversal in Gold Price - 23rd Aug 16
If Trump Can’t Pull Off a Victory, Expect a Civil War - 23rd Aug 16
Ceding ICANN and Internet Control to Globalists - 23rd Aug 16
How to Spot an Oversold Stock Market - 23rd Aug 16
Gerald Celente Sees Worst Market Crash, New Military Conflict, Gold Spike to $2,000/oz - 23rd Aug 16
EU Olympics Medals Table Propaganda Includes BrExit Britain - 22nd Aug 16
BrExit Win's Britain Olympics Success Freedom Dividend, Economy Next - 22nd Aug 16
Stock Market Top Forming, but Slowly - 22nd Aug 16
(Really) Alternative Banking Systems - 22nd Aug 16
Vauxhall Zafira Fires - Second Recall Issued - Inspection Before Bursting into Flames? - 21st Aug 16
Will the Stock Market Bubble Pop Regardless if the FED Never Raises Rates? - 21st Aug 16
US Government Spending - 3 Big Stories Not Being Covered – Part III - 21st Aug 16
Silver Analysis - 20th Aug 16
SPX New Highs, Correction Next? - 20th Aug 16
Housing Bubble - The Marginal Buyer Holds The Pin That Pops Every Asset Bubble - 20th Aug 16
Gold Miners Q2 2016 Fundamentals - 19th Aug 16
Which Price Ratio Matters Most in a Fiat Ponzi? - 19th Aug 16
Big Policies, Bigger Failures - 19th Aug 16
Higher Crude Oil’s Prices and USD/CAD - 19th Aug 16
Here’s Why You Should Look for Dividend Stocks and How - 19th Aug 16
Deglobalization Already Underway — 4 Technologies That Will Speed It Up - 19th Aug 16
These 6 Charts Show Why the Average American Is Fed Up - 18th Aug 16
SPX Easing Lower - 18th Aug 16
Low / Negative Interst Rate’s Legacy - 18th Aug 16
The 45th Anniversary of The Most Destructive Event In Modern Monetary History - 18th Aug 16
USDU - An Important Perspective on the US Dollar - 17th Aug 16
SPX Completes Wave 1 Decline - 17th Aug 16
How to Quickly Spot Common Fibonacci Ratios on a Chart - 17th Aug 16
When Does a Forecast Become a Trade? - 17th Aug 16
Kondratiev Wave - The Financial Winter Is Nearing! - 17th Aug 16
Learn "The 4 Best Elliott Waves to Trade -- and How to Trade Them" - 16th Aug 16
Stock Market Bears Turning Bullish At New All Time Highs - Time to Get Worried? - 15th Aug 16
Job Seekers Sacrificed to the Inflation Gods - 15th Aug 16
A Look At Commodities and Financial Markets Trading Week Ahead - 15th Aug 16
Stock Market New Top Forming? - 15th Aug 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

How to Trade Elliott Waves

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

Commodities

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. Shadowstats.com 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.

http://www.scribd.com/doc/102065884/Physical-Gold-antidote-against-the-ongoing-global-debt-crisis

Source - http://goldsilverworlds.com/gold-silver-insights/the-printing-press-is-running-hot-but-where-is-inflation-and-how-does-it-affect-gold/

© 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.


© 2005-2016 http://www.MarketOracle.co.uk - 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

Catching a Falling Financial Knife