Why Rising Inflation means Exploding Gold Price

Yesterday the UK admitted that their CPI Inflation value had hit 2.9% in December, as though this was ever any big surprise, certain commentators -notably Nadeem Walayat have been shouting this was going to happen for months now, to anyone who was listening, and the US is on Target for 3% imminently too.

But even by this silliest way of measuring inflation, it’s now clearly here for (hopefully) even the most retarded of economists to see.

The thing to understand here is that using the Government’s measurement of inflation, the CPI, is actually like looking in your rear-view mirror whilst doing 140mph in the outside lane.

You are looking for certain isolated effects of previous monetary policy, in certain areas only, areas which are carefully selected to make it look as good as possible for the Government, and

After the actual inflation (money printing) has fully worked itself through the economy and the business supply chain.

Their choice of what to include  in their basket of inflation indicators, and more importantly what not to include,  means that the CPI is not the full picture, and it is also then subject to random edits in the name of “seasonal variations”

And by the time it shows at all in the CPI, the cause of that was actions taken 6-12 months ago!

If you want to know what the real, un-manipulated figures (for any Government statistic) are, you need to go to www.shadowstats.com we’ve included the December “real CPI” graph below.

As you can see, the real figure is somewhere another 3% higher than the official figure.

Now, bearing in mind that the price of Gold is driven by the Real Interest rates

Real interest rates are the only metric that is correlated with the gold price. If you can hold U.S. dollars via Treasury bills, notes or bonds and they are paying a positive real interest rate that is not being inflated away, then why hold gold that doesn’t pay anything?

However, it is not a linear relationship. Instead, gold prices tend to significantly increase only if real rates become negative. The current bull market in gold that started in 2001 corresponds to U.S. three-month Treasury bill real rates falling below 0%.

That’s why I like to state that gold is money—money that offers no yield (a negative yield after taking into account storage and insurance) and which is continually valued against fiat currencies that offer a yield.

During times of low to negative real interest rates, gold reclaims its traditional role as money, with investment demand the prime driver of the gold price.

And bearing in mind that the real CPI is a primary component of the Real Interest Rates..

You can see that with a real inflation ratio of 6% or thereabouts,  and maximum interest available at 3.6% (ish) we are currently experiencing, and are guaranteed  to stay firmly in negative real interest rate territory for some time to come,.

In fact unless Governments suddenly all decide to raise interest rates  to 7% or above,  thereby bankrupting all the big banks and financials that are holding all that toxic interest rate dependent stock, it is virtually guaranteed that the real interest rates are going to be negative for the forseeable future.

So which way do you think the Gold price is going to go in 2010?

Even without any of the massive economic challenges  for 2010 that are almost guaranteed to cause more major systemic problems over the next year, the fundamentals  guarantee that Gold will also be the best investment of the next decade too.

Buy Buy Buy Gold

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