Fiat Money and Debt Monetization Pushing Gold Higher

By: Claus_Vogt

When gold broke out of a triangle formation in early September, a technical buying signal was generated. I discussed this bullish signal in my Money and Markets column and told readers that a move to new all-time highs had probably begun. Hence, I strongly recommended gold.

A few weeks later gold gave another buying signal. This one was even more important than the first, because gold had entered new high ground.

As you can see on the weekly chart below, gold broke out of a huge consolidation pattern that lasted from March 2008 until October 2009. This signal was telling us that the long-term bull market that began in 2001 was still intact and getting ready for its next medium-term up leg.

Since then, gold has continued its ascent by more than 10 percent. And the strong technical picture calls for the gold bull market to continue.

Yet in spite of gold’s strong gains there is still a lot of skepticism in regards to the durability of this price rise. The same old argument of the gold permabears is being repeated time and again: Since gold doesn’t pay interest or dividends, it must be a bad investment.

Of course we know that gold does not pay interest. Nor does crude oil, wheat, or any other commodity. But we also know that this shortcoming does not forestall rising prices. And yes, gold is a non-productive investment. It doesn’t help economic development.

Gold is the ultimate inflation hedge.

However, its usefulness is very different: Gold is insurance against the follies of government, especially against inflation. No more, no less.

I bring this up because …

Big Spikes in Inflation Share Two Characteristics …

If you have ever glanced through a history book, you may have read how governments all over the world implemented foolish and dangerous policies time and again. Unfortunately, today we’re living through one of those sad times.

Economists and historians have examined the important topic of inflation. And their findings are clear: Inflation is always a monetary phenomenon … it does not appear out of thin air … and it’s always the result of specific monetary and fiscal policies.

Empirical studies have plainly shown that all big spikes in inflation had two common characteristics:

1. Fiat money, and
2. Strongly rising budget deficits mainly financed by monetizing government debt.

Both characteristics are present today, and not just in the U.S. but globally. Historically, most monetary regimes were based on money backed by gold and silver. But now the whole world is using money based solely on promises and faith.

When the financial crisis hit in 2007/08, governments all over the world reacted the same way: They started a debt binge accompanied by an extremely lax monetary policy. And central banks monetized government debts. They termed the notion “quantitative easing.”

These are the very same policies that were present during every large jump in inflation in the history of mankind! And these are the main fundamental drivers behind gold’s advance today.

As long as there is no major fiscal and monetary policy change, I expect inflation to heat up and gold’s bull market to continue. So I suggest you consider including gold as a hedge against inflation in your portfolio.

Best wishes,

Claus

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