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Stagflation in UK a Real Risk to US and Western Economies

Jan. 26, 2011 7:16 AM ETGLD, SLV
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GoldCore's Blog
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What were termed "shock" UK GDP figures yesterday, led to falls in the FTSE and the pound sterling which fell against the dollar and gold. Sterling's fall saw sterling gold prices rise from £833 per ounce to over £842 per ounce after the news. 

Economists were once again surprised by the very poor UK GDP figures which showed the economy has contracted by 0.5% rather than growth of 0.5%. This clearly shows that the UK is now experiencingstagflation or high inflation and very low or contracting economic growth. 

Gold's strength in pounds continued this morning and it has risen to over £846 per ounce. Counterintuitively, UK bonds were bought and the yield on the 10-year fell 5 basis points to 3.62%. These gains have been given up this morning, and given the degree of the economic contraction and the fact that inflation looks like remaining stubbornly high for the foreseeable future, UK gilts will likely soon come under pressure with a corresponding rise in long term interest rates. 

Inflation in the UK is, according to government figures, 3.7 percent, which is almost double the BoE's target and likely to rise further in the coming months. While the consensus of most economists is that a return to recession is unlikely and inflation will not become a long term threat, unfortunately they will likely be proved wrong once again. The double-digit rates of inflation seen in the 1980s are quite possible again and should not be rejected in a knee jerk reaction to fit preconceived notions. 

Some economists are already spinning this as "stagflation-lite" when the reality is that they do not know how severe the stagflation could become. It is as ever best to err on the side of caution and hope for the best but acknowledge the real risks of less benign scenarios. The uber bears continue to warn of hyperinflation and while that scenario does not look highly likely at this time - it is important to acknowledge that the current monetary pathology of the Federal Reserve and some other central banks may lead to an international currency crisis. 

Investors and savers should prepare accordingly rather than being complacent and inert with the attendant deleterious consequences.

Gold is trading at $1,335.50/oz, €974.75/oz and £841.79/oz.

Silver is trading at $27.06/oz, €19.75/oz and £17.06/oz..

Platinum Group Metals
Platinum is trading at $1,795.50/oz, palladium at $795.50/oz and rhodium at $2,400/oz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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