Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
9.WE HAVE NO CHOICE BUT TO INVEST IN STOCKS AND HOUSING MARKET - Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
Elliott Waves: Your "Rhyme & Reason" to Mainstream Stock Market Opinions - 6th Aug 22
COST OF LIVING CRISIS NIGHTMARE - Expect High INFLATION for whole of this DECADE! - 6th Aug 22
WHY PEAK INFLATION RED HERRING - 5th Aug 22
Recession Is Good for Gold, but a Crisis Would Be Even Better - 5th Aug 22
Stock Market Rallying On Slowly Thinning Air - 5th Aug 22
SILVER’S BAD BREAK - 5th Aug 22
Stock Market Trend Pattren 2022 Forecast Current State - 4th Aug 22
Should We Be Prepared For An Aggressive U.S. Fed In The Future? - 4th Aug 22
Will the S&P 500 Stock Market Index Go the Way of Meme Stocks? - 4th Aug 22
Stock Market Another Upswing Attempt - 4th Aug 22
What is our Real Economic and Financial Prognosis? - 4th Aug 22
The REAL Stocks Bear Market of 2022 - 3rd Aug 22
The ‘Wishful Thinking’ Fed Is Anything But ‘Neutral’ - 3rd Aug 22
Don’t Be Misled by Gold’s Recent Upswing - 3rd Aug 22
Aluminum, Copper, Zinc: The 3 Horsemen of the Upcoming "Econocalypse" - 31st July 22
Gold Stocks’ Rally Autumn 2022 - 31st July 22
US Fed Is Battling Excess Global Capital – Which Is Creating Inflation - 31st July 22
What it's like at a Stocks Bear Market Bottom - 29th July 22
How to lock in a Guaranteed 9.6% return from Uncle Sam With I Bonds - 29th July 22
All You Need to Know About the Increase in Building Insurance Premiums for Flats - 29th July 22
The Challenges on the Horizon for UK Landlords - 29th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Inflation and Precious Metals, Gold and Silver

Commodities / Gold & Silver May 12, 2007 - 07:09 PM GMT

By: Paul_Saxena

Commodities

"In an ideal world with a stable monetary base (zero monetary inflation), prices of almost everything (with a few exceptions) would be in decline. That would be a sign of real economic progress…"

INFLATION/DEFLATION - Analysts and economists seem to be divided over this issue. According to some market observers (including me), we are living in a highly inflationary environment. After all, money supply growth is extremely strong in most countries (Figure 1) and this represents inflation.


Figure 1: Explosive Inflation!

Source: The Economist

The other camp argues that since prices of certain consumer goods are either stable or in decline, we are indeed witnessing genuine deflation. In my view, these "deflationists" seem to miss the point that falling consumer prices (due to improvements in technology or the relocation of manufacturing to relatively inexpensive developing nations) have nothing to do with deflation and everything to do with economic progress. In fact, I would argue that in the current economic environment; due to technological advances, rising productivity, free trade and cheap labour, prices SHOULD be declining. After all, this is the whole point of genuine economic development!

In an ideal world with a stable monetary base (zero monetary inflation), prices of almost everything (with a few exceptions) would be in decline. That would be a sign of real economic progress as people's savings would buy them more goods with every passing year. In our far from ideal world however, the factor preventing this from occurring IS monetary inflation. Due to central-bank sponsored inflation, prices of assets (whose supply is relatively limited when compared to money) are going through the roof! As a result of the ongoing inflation, even basic commodities which are critical for human survival (land, energy and food) have become very expensive, hence scarce for the average person. So, next time when someone tells you that we are witnessing deflation, tell them to look no further than the escalating cost of housing, energy, food, education and medical care.

Finally, if we were indeed witnessing genuine deflation (contraction in the money-supply), all asset-prices would be declining rather than flirting with multi-year highs!

PRECIOUS METALS - We are in a primary bull-market which is currently undergoing a healthy medium-term correction - everything else is "noise". Such corrections are normal and serve the purpose of shaking out the latecomers and the "weak hands". More importantly, such periods of weakness give us the ideal opportunity to increase our positions. I am not sure about you, but I always prefer to buy assets when the sentiment is negative and there is widespread fear amongst the investing public. Furthermore, I never purchase anything after a big rally. This is the reason why despite the brutal sell-off in commodities over the past several months, our managed accounts have held up reasonably well.

I have no doubt in my mind that both gold and silver will appreciate considerably over the coming years. Here are the reasons why:

Terminally-ill US Dollar

Rampant monetary inflation equals debasement of currencies

Record-high US trade and current-account deficits

Major top in the US bond-market and rising interest-rates (which will hurt housing)

Sky-high debt levels in developed nations; only option is to inflate the currencies

Rising geo-political tensions and increasing resource wars

A major bull-market in crude oil due to rising demand and tight supplies

Gold and silver are inexpensive in real-terms (inflation-adjusted basis)

Extremely cheap in comparison to financial assets (stocks and bonds)

As I explained in my previous reports, I do not expect gold and silver to surpass their May 2006 highs in the near future. I am of the opinion that both gold and silver are likely to decline into the summer months before embarking on a huge rally towards the end of this year. This action will shake out more weak hands and set the stage for a big advance.

However, if we do get a major conflict in Iran, you will be really glad that you own precious metals.

At present, Asian central banks hold a miniscule 1.5% of their total reserves in gold (Figure 2). You can imagine what will happen to the price of gold when Asian countries start diversifying into the yellow metal. Recently, China announced that it plans to invest US$200 billion of its US$ 1 trillion reserves in strategic assets. So, this move out of "paper" is already underway.

Figure 2: Asian Reserve Holdings

Since the commencement of this bull-market, precious metals mining shares have provided a leverage of 300% compared to physical bullion. However, over the past few months, physical bullion has outperformed the mining shares. These changes in relative strength are normal and I would advise you to utilise any near-term weakness in mining stocks and invest heavily.

By Paul Saxena
www.purusaxena.com

Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication available at www.purusaxena.com. An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.

www.dailyreckoning.co.uk Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. The Daily Reckoning and its staff do not accept liability for any loss suffered by readers as a result of any such decision.


© 2005-2019 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