Gold Market Shifts Focus to Real Global Inflation Rates

By: Christopher_Laird

Gold is shifting focus to world inflation. There is widespread inflation near 10% or more across the world. The EU is escaping some of the worst of it, but still is likely looking at 4%. Inflation in China 10%, India 7.6%.The US has 8% inflation (according to ShadowStats.com based on the method of calculation before the Clinton era, and not that ridiculous 3% which is whitewashed data). The Mid East 10% plus. 

Just like Richard Duncan said, in the seminal book The Dollar Crisis, excess USD reserves flowing to our trade partners is causing inflation in those countries, as they have to wash that money into their own currencies.

High demand for essential commodities, such as grains and oil, is forcing up world inflation. Both are in shortage. If the food shortages are already causing panic buying of rice, so then, oil is ready to see possible huge price spikes since the world has not seen rising oil production since roughly 2005, but oil consumption continues to rise dramatically. There used to be some extra world oil production capacity, but now there is little to none.

In addition, there is a big power shortage in much of the world. That affects mines, as do record diesel prices. But, with shortages of oil and grains, the inflation genie really popped out of the bottle. The poorer nations and the big developing ones are scared of what rising rice and wheat prices will do to their stability. Fertilizer prices have doubled and more in the last year. Rice, doubled and more, wheat doubled and tripled then fell back, but is still quite high. Wheat, rice, oil are all in shortage. Grain and oil prices are inputs to just about all other prices.

Since energy and food are in shortage, unless there is some supply relief, food and energy inflation will remain with us. This is not a short term story. Grain consumption has increased faster than supply, and most nations have sold off their surplus in recent years. That means that there is very little cushion for grain prices in the coming year. Oil is in the same predicament, as world oil production has already peaked, arguably, in 2005. Since then, world oil production has largely leveled off. There is no surplus oil capacity.

Gold market shifts focus to inflation

As story after story filled the news about grain shortages this year, and oil production peaked and there is little excess capacity, the gold market just shifted its focus in May to the inflation story. Just prior, the gold market was focusing on the (supposed) improvement in the credit crisis. The credit crisis had boosted gold from the $600s to over $1000 but it fell back a bit on the supposed improvement in the credit crisis. But, now it looks as if gold is getting ready to retest $1000, as its new focus is on the big world inflation story, particularly in food and energy. And as I said, this inflation story is not going away anytime soon.

One example of how the gold market has shifted focus to inflation is how gold has reacted to news on its commodity/jewelry demand. With gold prices this high, jewelry off take has been way off (tonnage wise), and scrap gold in the hundreds of tons have hit the market. Nevertheless, gold is rising now and likely to keep its big gains since it gained over 50% since the August 07 credit crisis began. Gold shifting focus to inflation allows it to keep these high levels longer term.

Another example of how gold shifted focus recently to inflation is its rally now after news that the credit crisis is improving. There was some question as to whether gold was going to keep correcting a few weeks ago. I think it is reasonable to say that gold has now begun a new ascent, possibly to a new high over $1000. And this recent ascent is driven by all the inflation news around the world which is a longer term trend.

It certainly helps gold if oil continues its ascent this summer as the peak driving season begins. Of course, high gas prices may cause demand to drop. Nevertheless there is big pressure on oil prices from this upcoming seasonal demand, and it's quite possible oil could hit $150 before correcting. 

Regardless, there appears to be a monster oil rally in progress, although there is a risk of a significant correction since oil has risen so fast recently.

If you agree oil production has indeed peaked, then we are likely to see oil prices in the $150 range, and gold will rise dramatically to over $1000 based on that alone probably. That is because oil prices are one of the key drivers for inflation, since oil is used to make and transport most products. And again oil, being the world's predominate energy source, is a necessity. Inflation in necessities is the big story emerging this year.

We mentioned to subscribers in recent weeks that, since there is big inflation in necessities now, and that it was just a matter of time before the gold market focused on this. That is now happening.

On May 8, we alerted subscribers that gold was likely bottoming and going to turn around based on the gold market shifting focus to the world inflation story. Gold was $880 then. The gold market was in the process of shifting focus to world inflation at that time. We were one of the first newsletters to make that call. You can see that alert in our sample alerts page. Gold could always retest $900, but we see gold heading to $1000 in coming months. 

By Christopher Laird
PrudentSquirrel.com

Copyright © 2008 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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