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Are gold prices signaling Inflation?

|Includes: SPDR Gold Trust ETF (GLD)

Inflation is not a mayor concern at this point.  Inflation numbers measured by the CPI are not giving signs of trouble.  Usually inflation starts to pick up at the end of the business cycle, when an economy is growing at its fullest . Right now the U.S economy is just recovering from a deep recession, and Europe is facing a new contraction.

Gold through time has proven to be a safe guard against inflation, therefore  investors  buy gold when inflation is a threat. Gold prices have been rising and it is now at an all time high of 1230 dollars an ounce.  This fact raises a question: why is gold raising so much if inflation is under control? Gold future prices fluctuate mainly because of speculation. The demand of the physical product is clearly not the reason for demand of futures, this is given Gold has only a few industrial uses and is also used in jewelry. Traders and investors are the ones pushing the price of Gold up. George Soros, president of Soros Fund Management LLC is a famous multimillionaire investor that has been taking positions in Gold. This means that some investors are expecting inflation to pick up in the near future.

Based on empirical facts, sustained inflation is usually a threat when the monetary base rises, this is if the treasury prints more money and is injected into the economy.  Usually Irresponsible printing is not a problem, but now there are some reasons to start to think about this issue. The U.S will face big trouble paying all the debt it has. It owes money to foreign countries because they are the mayor holders of treasury bonds, and it owes money in the form of social security benefits to Americans. Studies has been made by various analyst and they have got to the conclusion that the U.S will not be able to pay with what they owe if collected right now for  the amount of money they will have to pay in social security benefits.  This is because people getting older and requesting social security benefits are greater than people working and paying social security.

There are not many choices to solve this problem. Under the options are: Raise the burden of taxes and social security, but it will create a deep recession. Don’t pay, but will create insecurity and instability and will create recessions. Create inflation to devalue the currency in order to pay every debt with cheaper dollars, this will decrease the purchasing power of the dollar, but it might save the country form entering in a recession.

It is not possible to know for sure what will happen in the future or when will it happen. Policy maker’s decisions will have a big influence on the outcome of this situation. Gold future prices appear to be signaling that one of the outcomes will be inflation, but investors and traders are not always right. Only time will tell the outcome of this, what we know is that the windshield is not clear and only the savviest investors are the ones that are going to succeed in this markets.





Disclosure: No possitions