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Nothing Except Silver Prices Below 2008 Levels – But No Inflation Yet

Jul. 01, 2013 7:53 AM ET
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Gold and Silver prices took massive hits ever since the Fed started hinting at a "Taper" in the QE program as the Economic data out of the U.S. continued to show recovery numbers. The U.S. Fed has on several occasions confirmed that Inflation remains subdued and so a non-issue yet as it shows no signs of rising in the immediate future. How many times have you heard or read that there is no Inflation because the CPI says so? Gold and Silver prices have been driven sharply to the upside on fears that the Fed's stimulus to infinity may trigger massive inflation. After the recent notable decline in gold and silver prices, many precious metals investors are questioning whether or not to continue to hold their long positions, since inflation never showed up even after five years of non-stop money printing. At this point, it may make perfect sense to take a step back to gain some perspective on the matter by looking at the past, present and likely projected future of the gold and silver prices. Put simply, the manipulation in Gold and Silver prices has been picture perfect until now. Clearly, Gold and Silver paper derivatives do not seem to price in key fundamentals at this point. Movements in paper Gold and Silver prices are shaping the market sentiment, and are moving the precious metals far off the radar screen as an attractive investment. Nevertheless, the irony of physical demand for precious metals is that despite the recent decline in Gold and Silver prices, a surge in physical demand is occurring.

Macro sentiment still seems to be living in fantasy land. It tends to assumes that stock market corrections are cyclical and not secular in nature. There also seems to be an assumption being made that the Federal Reserve will step in to support a falling bond market. A housing market recovery seems to be happening, despite a clogged foreclosure pipeline creating considerable shadow inventory. The much touted non-recovery is finally manifesting itself via rising mortgage rates. The sad truth regarding pent up foreclosure-based shadow inventory will reveal itself soon. There has also been a hedge fund investor pull back from the PMs and lumber prices are falling. Moreover, every asset on earth trades ultimately based on interest rates. And with the Fed losing control of interest rates, it's only a matter of time before the $70+ TRILLION bond market implodes, sending rates sharply higher and triggering a financial meltdown far, far greater than the 2008 Crash. Also by intervening on an almost daily basis in the bond market, the Fed has manipulated the entire US debt curve to the point that we are now heading for a Crisis far worse than 2008. The United States increasingly cannot afford its debt service. A Treasury bond market crash will likely ensue after signs of a pending default become clearer and clearer to investors. More pressure will be placed on the Fed to monetize, as the U.S. Dollar crashes hard. With respect to pensions and 401k plans, the coming market volatility will probably 'convince' the masses that the government knows better. Sadly, the 'government guarantee' seems to be the sacred cow that will be sacrificed to bring about the great "financialization" of everything.

The Truth about Inflation and its impact on Gold and Silver prices:

In absolute layman terms, an economic recovery or a rising economy implies that incomes are rising, debts are slimming and spending is seeing an up-tick. Rising incomes then further imply that there are more people holding jobs and a rise in spending declares that there is more demand for more things in the markets which in turn justifies higher incomes and more jobs for catering to the higher demand. Naturally, debts would be on a sharp decline as offloading debt is (or should be) higher on priority than fresh spending or creating new debt. But more obviously with a higher demand based upon spending rises, will enter Inflation. Higher the demand - higher the prices and vice versa is a market fundamental. But of late, by manipulating the paper market and economic numbers, the Fed wants us to believe that the economy is on the rise and that the fundamentals of "Demand and Supply" or the Demand and relative Pricing" are all wrong. Yes, the CPI data has been chopped, diced, and shredded into what the Government wants. Low inflation, to make us all "feel good" and keep them (the Gov't) from paying out huge money to people receiving payments from the Gov't that are tied to CPI.

Contrarily, economic norms seem to have taken a stunning new turn in the past few years. More debt seems to be a parameter of a better economy. Trying to reduce new debt seems to be a Big No-No. How else do you justify the rise in stock markets whenever there is an assurance of continued monetary stimulus by the Fed and a fall on a simple hint of a "Taper" in QE? So thus the "Bad News" became the "New World's Good News". Real Jobless numbers are still at record levels, (older or retire-able workers gaining employment and in another case, given numbers are massively manipulated by reducing number of hours worked by 50% to accommodate new labor just to show lower jobless number) and incomes are yet around 2008 levels in most cases. Oh! DEBT - Everyone knows that it is simply and peacefully rising by the hour. Its OK - the economy is improving. You ask How? How dare you question the Fed's capability or the intention regarding the economy?

Take a look at Inflation for just the last 2 years...

Food and beverage prices increased 5.6%
Cereal and bakery prices increased 11.5%
Sugar and sweets prices increased 11.8%
Cooking oils prices increased 11.6%
The cost of medical care increased 6.7%
Medical care services increased 7.1%
Hospital services increased 14%
The cost of education increased 10.7%
Educational books and supplies increased 14.9%

So how does that affect you? The word is "Badly".

The Fed's Best statement yet seems to come from Believe it or Not - "Inflation remains subdued and is yet a non-issue". Gold and Silver prices would, for obvious reasons, get unattractive and fall out of favor when there is virtually no substantial threat of Inflation and eventually decline - which they did.

Did you notice that ONLY SILVER Prices are below the 2008 levels - that is $20 and Nothing Else. Not Even Gold. That is why I am more Bullish on Silver than anything else. Even in 1980, Silver prices averaged $20 per ounce. What else can you buy below the 2008 prices today? Remember - Downplaying Inflation can help the Fed overstate growth.

Why Did Food Price Inflation Rise in 2008 and why they again will in 2013?

Food prices rise in response to high gas prices. That's because transportation is a large cost of food you buy at the store. When you notice prices at the pump rising, expect to see the same thing happen in about six weeks at the grocery store. High gas prices are, themselves, usually caused by high oil prices. Here again, it usually takes about six weeks for increases in oil futures to translate to the pump. Food prices are expected to rise three to four percent this year, according to the U.S. Department of Agriculture. That's because of the terrible Midwest drought in 2012 that withered crops in the field. As a result, prices for corn, soybeans and other grains rose. Since it usually takes several months for these commodities prices to translate to the food you buy, most of the drought's effect will occur in 2013. Higher feed prices will directly affect the cost of meat and any other animal-based product. Also hardest hit will be cereals, baked goods and other grain-based food. (Source: USDA, Food Price Outlook 2013)

Food price inflation caused food riots in 2008, when prices rose a whopping 6.8%. Commodity speculators also caused higher food prices in 2008 and 2009. As the global financial crisis pummeled stock market prices, investors fled to the commodities markets. As a result, oil prices rose to a record of $145 a barrel in July, driving gas prices to $4.00 a gallon. Part of this was based on surging demand from China and India, which escaped the brunt of the subprime mortgage crisis. For more, see Gas Prices in 2008. This asset bubble spread to wheat, gold and other related futures markets, droving up global food prices dramatically around the world. As a result, food riots by people facing starvation erupted in less-developed countries.

Four Reasons for Long-term Food Price Inflation

Grocery prices have actually risen 2-3% each year between 1990-2011. There are four global policy shifts that are causing this inflation in world food prices. First, the U.S. government subsidizes corn production that is used for bio-fuels. This takes corn out of the food supply, raising prices. Second, the World Trade Organization (WTO) limits the amount of corn and wheat that the U.S. and European Union (EU) can subsidize and store in stockpiles. This reduces the cushion available to add to the food supply when there are shortages, thus adding to food price volatility. Third, as more people around the world are growing more affluent, they eat more meat. Grains are going to feed the animals that provide meat, further reducing the supply and increasing price volatility. Fourth, higher oil prices lead to higher food prices. Food is transported great distances, especially if imported. Higher oil and gas prices increase shipping costs, which translates into higher food prices. When food shortages and rising prices drive people to desperation, social unrest soon follows.

All about Inflation:

Price hikes only for a particular item here or there don't qualify as inflation. If one thing gets more expensive but something else gets cheaper, that's what economists call a relative price change. Inflation is a simultaneous increase in prices across the board. Some measures of inflation, such as the GDP Deflator, track price changes that affect businesses as well as those that affect consumers. But the Consumer Price Index is supposed to focus on inflation at the consumer level. And the CPI has recorded minimal increases over the past four years. Since the recession ended, the 12-month change in consumer prices has averaged 2% and has never been as high as 4%. There are lots of other ways to gauge inflation, however, that give very different signals. The Reuters CRB Commodity Index, which tracks the prices of coffee, cocoa, copper, and cotton, as well as energy, is up 38% over four years, or 8.6% at a compound annual rate. It may well be that these increases in the cost of raw materials aren't translating into broader inflation because the economy is so weak. For sustained inflation to get going, workers have to be able to demand higher pay to make up for increases in their cost of living. And today, whatever inflation is caused by the rising cost of raw materials is being offset by below-normal increases in wages. Nonetheless, many of the everyday costs that Americans face have risen a lot.

The price of gasoline has gone up from $2.60 a gallon when the recession ended to $3.68 today. (With inputs from Business.time) That's a 41% increase in four years, or an annualized rate of 9%. Taxes have gone up almost as much. Federal, State and Local income taxes and social charges (Social Security payroll taxes, for instance) have risen 35% over four years, an annualized rate of 7.8%. Even the cost of a Big Mac (McDonald's hamburgers) in the U.S. has risen from an average of $3.57 to $4.37, or 5.2% a year. So why these, more rapid increases haven't shown up in the Consumer Price Index? One reason is that the index itself has been modified in a variety of ways over the past 35 years. Fluctuations in home prices have been smoothed out, for example. And the index has been adjusted periodically to reflect changes in what people buy, particularly if they shift from more expensive items to cheaper ones. Such revisions to the CPI have tended to reduce the official inflation rate, on balance. Various estimates of what the annual rate would have been over the past four years, if earlier methods of calculation had been continued, come up with numbers in the 5%-to-10% range. Several conclusions can be drawn from all this. First, there is no absolute and objective gauge of inflation. Any particular measure is simply one way of making the calculation, based on a host of assumptions. Second, a number of the costs that middle-class households face are going up considerably faster than the CPI. Inflation and real prices are rising more and faster than official statistics indicate. At the moment, these trends aren't highly visible because the economy is so sluggish. But as the recovery continues, there's every reason to think that they will become more widespread.

Only Gold and Silver can Bail you out from the looming Doom:

The last inventory clean out came after a bout of lower Gold and Silver prices. Just imagine what fear and greed will do to the remaining inventory and production, considering that massive damage to the mining sector has already been done. The latest market rout indirectly serves to support Gold and Silver prices in the long term by forcing numerous suppliers out of the market, as their productions become increasingly uneconomic. Once stock and Bond markets start crashing and the U.S. Dollar ultimately meets its day of reckoning, scared investors will very likely rush out of bonds and equities to real stores of value like Gold or more into the now much more cheaper - Silver.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long in Silver.

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