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Commodity price increases due to QE II will soon make their way into supermarkets—protect yourself

In reaction to today's announcement of the second round of Quantitative Easing (i.e. money printing) by the U.S. Federal Reserve, both gold and silver are reaching record highs. Gold is closing in on $1,400 and silver is at a new high of $25.5 per ounce.

But it is not just gold and silver that are going up. According to the National Inflation Association (NIA) "in the past 60 days alone, cotton prices are up 54%, corn prices are up 29%, soybean prices are up 22%, orange juice prices are up 17%, and sugar prices are up 51%. Meanwhile, the Dow Jones has only gained 9%." Those who praise the stock market's performance over the last months should realize that stocks have in reality been loosing ground against real goods. The recovery exists only paper and is a result of the Fed's money printing policy. How?

Due to the out-of-control debt situation and the sluggish U.S. economy, the Fed has been diluting the value of the dollar by putting large quantities of fresh money into circulation. On the one hand, the Fed is paying off U.S. debt by buying up U.S. Treasuries (bonds) from international holders. On the other hand, the Fed is sponsoring new economic stimuli in concert with the U.S. Government. As a result, producers of real goods expect their hard-earned dollars to be worth less and less and have started to adjust their prices more aggressively. Holders of stocks have done this too, but were only able to do this to a limited extent. Everybody needs food, while stocks represent companies producing goods of all degrees of (un)necessity—guess who will be able to increase their prices more—the food producer, or the stock market speculator?

As the NIA continues, "the agricultural commodity price increases of the past two months will begin to make their way into all supermarkets nationwide during the next few months." In other words, the global dollar inflation will soon be imported to the U.S. and Europe and the stock market returns will not even remotely cover the price increases people will soon experience in real life. Inflation-adjusted, the stock market gains will suddenly turn into losses. This also reflects the economic reality—there has been no increase in real production as mesured in units to justify the recent strong nominal stock market gains.

Now, you may be wondering what to do with the dollars, pounds and euros that you hold in cash or in a CD. If you have a large sum, you have many options. Agricultural commodities are definitely an interesting place to look at. For instance, you can track the Rogers International Commodity Index (RICI) via Merril Lynch or ABN-AMRO. Your personal or online broker should be able to point you to many more commodity investment funds and indexes. In any case, please do your homework because the fees and the performance can vary immensely.

But if your funds are limited to an equivalent of a few thousand dollars, gold and silver may be the best option to preserve your purchasing power. You can open an account with an online custodian such as BullionVault or GoldMoney. Have your checking account linked to them so that you can sell your gold or silver and have the money transferred back to you with a few clicks. Or purchase a few gold and silver coins from one of the A-Rated gold dealers we have reviewed and sell them back to the dealer whenever you are ready. It's that easy.

Disclosure: long gold, silver