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How global asset deflation will quickly morph into consumer price inflation and higher gold prices

By: Peter Cooper, Arabian Money

-- Posted Wednesday, 3 July 2013 | | Disqus

Volatile financial markets make if very difficult for most investors to keep track of what is going on. It can also be very confusing when gold, for example, suddenly loses value for no particular reason and both stocks and bonds sell-off.

Thatís because most financial commentators are just momentum followers. They tell you how prices are not moving and do not examine the underlying monetary conditions behind this change.

Whyís gold down?

Higher interest rates, for instance, are immediately blamed for a decline in the gold price. That is the immediate effect. Indeed, any asset with a lower return will be impacted, so we see falling prices for commodities across the board (except oil because the geopolitics of the Middle East), and lower bond and stock prices.

However, when assets are liquidated they are liquidated into cash. Remember that. Central banks will also respond to these market deflations by printing even more money.

Now we have seen a historically huge creation of money by the global central banks over the past five years to combat a deflationary financial collapse, anything between $7 to 12 trillion, the numbers are so big as to be meaningless to most people.

Some of this money has gone into asset price increases. Thatís why house prices are so high for the state of the economy and the same is true for share prices. But most of it got stuck in the system on bank balance sheets.

Inflationary consequences

The problem now in a global asset sell down is that this money is being released into the economy. Too much money in circulation and you get consumer price inflation. Wonít people then demand higher salaries? Well thatís certainly happening in the UAE where salary increases are running at the highest levels for four years.

See how pulling money out of stocks, bonds and even gold can have nasty inflationary consequences? And what will investors buy to protect themselves from such inflation?

What you need is a money that cannot be printed. Whoís supply is limited by natural constraints and outside the control of central banks. Gold and silver are the only monetary metals available.

Thatís a tough sell these days to holders of the GLD gold ETF who have sold half of the fundís holdings to leave it with $38 billion in gold. Still it is not been so bad for long-term GLD holders.

It has returned more than doubled the total return of the Standard & Poorís 500 Index since its 2004 inception with a 158 per cent return since launching; that compares to the S&P 500ís 63 percent gain for the same nine years.

Whatís next for gold?

What happens next for gold is that consumer price inflation starts to emerge unexpectedly and in unexpected places like the supermarket trolley as there will be just too much money in circulation in the economy. Higher gas prices are a no-brainer.

The snap back for gold prices will be swift as Mr. Market sees his recent error. In 1998 the Nasdaq pulled back 40 per cent but still went on for its huge final dot-com crash spike into the millennium.

Gold has just not seen its spike yet but it could be coming quickly, just around the corner. Investors who abandon gold now will be kicking themselves in the near future like those who dumped tech in 1998.

To stay ahead of the momentum traders you need to consider the wider economic issues but you will still need to have the actual investment solutions that our sister publication the ArabianMoney investment newsletter (subscribe here) recommends each month to its subscribers only.

-- Posted Wednesday, 3 July 2013 | Digg This Article | Source:

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About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link


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