Look Here For An Inflation Proof Currency

I knew it. This headline draws attention these days. As the world wakes up to the fact that all currencies are created out of thin air by a simple entry into the electronic ledgers of the world's central banks investors begin to look for investments whose safety does not depend on an agency rating.

This chart from the World Gold Council may help your investment decisions.

click to enlarge

Graph: This chart is a very graphic description what happens once nations abolish the gold standard in favor of unbacked fiat currencies. Remember: No fiat currency has existed longer than a human's lifespan and the Federal Reserve Dollar is already a Methusalem at 94 years. Chart courtesy of World Gold Council

The accompanying text makes a very important point: In the very long term only gold has proven absolutely inflation proof.

The value of gold, in terms of the real goods and services that it can buy, has remained largely stable for many years. In 1900, the gold price was $20.67/oz, which equates to about $503/oz in today's prices. In the two years to end-December 2006, the actual price of gold averaged $524. So the real price of gold changed very little over a century characterised by sweeping change and repeated geopolitical shocks. In contrast, the purchasing power of many currencies has generally declined.

Now put the fact of understated inflation figures in the past 2 decades and the resulting under-valuation of gold into the equation and you arrive at a surefire winner for the coming years until the system has cleared out all credit-fuelled excesses of this speculative past made possible by low interest rates which effectively hurt the interests of that rare species: the net positive saver. Gold has to make it past the $2,000 mark only to catch up to its nominal high in real terms.

Money Supply M3 Now Growing at More Than 14% YoY

If you need more evidence that the future of the current currency system looks bleak, shadowstats.com delivers the horror news. As the Fed does not publish these figures anymore in good old Soviet style (hide bad statistics) shadowstats calculates an appoximative continuation of M3 that shows that money supply is out of control. I wonder if they can do it for less than the Fed.

All those so-called "liquidity" "rescue" operations were nothing else than the creation of new money without a corresponding value. I faintly remember from some textbooks that this is called monetary inflation. Deducting 4% GDP growth from 14% M3 growth results in a true monetary inflation rate of 10%. I think prices at your grocery store align better with this rate than the funny "core" rate.

Graph: If you want to fend off inflation, only gold will do the job. M3 growth accelerated to an annual record rate of 14% thanks to the "liquidity" "rescue" operations of the Federal Reserve. According to the rule of thumb 14% M3 growth minus 4% GDP growth result in a true inflation rate of 10%. Chart courtesy of shadowstats.com

Do you need any more proof that gold will be a very promising investment in the near future? This bull market is still in its very early stages as the general public has no gold under their mattresses yet. Just imagine what will happen upon the rediscovery of gold as the ultimate currency: 5.5 billion people will bid for some 5 billion ounces of gold. Get yours today.

Comments

[One FamilysBlog]

The point about holding gold instead of a currency is pretty convincing. As an investment, it is a good option only as a short-term hedging instrument - the long-term inflation adjusted return on it is 0.

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[Brian Croner]

This is something to be hiding. Hyperinflation. I wonder if the world is in for a global currency crisis? Where money becomes drastically inferior to gold worldwide? Then what? A global depression? You can't eat gold. I'm wondering the significance of barter trade.

[Quaker]

If you look at the markets it's not that complex. In the last two weeks, the fed added 200bn in overnight repo's. We haven't had that kind of printing since Weimar Germany but the dynamic is simple.

Bank's have $200bn withdrawl of short term credit. Fed clicks a few keys. Numbers pop up on a screen. Banks have new $200bn loan. $200bn of money fed made created out of thin air. $200bn in money taken out of banks has to find new home. What to do?

$200bn is all the equity of the top three banks in the world. The transaction took gold up $50 an ounce. There are roughly 70,000 tons of gold in the world with a market value $1.5 trilllion. If Gold trades at the same % stocks trades, 1% or so a day, 200bn represents a HUGE percentage of the float.

IMO, Gold could easily go up to $1,000. That's not even the market cap of the worlds 10 biggest worldwide corporations. It's a trivial amount. It's less then half the foreign holdings of US treasury bonds.

[oldcrow]

So given the truth of the article, you can stay even with inflation, but you'll never exceed it when you buy gold. The only way is to hit a good stock like EMC or VMW.

[spotthedog]

Inflation is caused by expanding money supply. Stop that and you stop inflation. This is the principle behind fixed-supply currencies such as the DiBuck (www.dibuck.com).