Western Economies Experiencing Early Stages of Stagflation

By: Mark_OByrne

Gold and silver continued to surge yesterday with gold up nearly 1% (up $8.25 to $927.80) and silver up 2% (up $0.35 to $17.97). Gold continued to rally in Asia but has succumbed to some profit taking in early trade in Europe. Gold has risen on the continuing oil surge with oil reaching new record highs (above $135) again this morning and oil remains near these record levels.

After falling to a monthly low below 1.58 to the Euro last night, this morning the dollar is tentatively stronger versus the Euro but is down against sterling and most other currencies.

Investors are prudently hedging against inflation with gold and some see gold as a safer play than oil right now because gold has had a healthy correction and is flat in the last 30 days while oil has surged to new record highs and is up more than 10% in the last 30 days. Uncertainty regarding the outlook for stock markets which historically have performed very badly in periods of stagflation will lead to a resumption of safe haven demand in the coming weeks.

The gold/ oil ratio strongly suggests that oil is now a hold or sell while gold is again a buy. Similarly with the silver/ oil ratio.

Western Economies Experiencing Early Stages of Stagflation
The inflation genie is well and truly out of the lamp and with the Federal Reserve reducing their growth forecasts for the year yesterday, the U.S. and most western economies are now facing a nasty bout of stagflation.

Federal Reserve officials reduced their projections for economic growth this year by almost a full percentage point and raised their forecasts for inflation amid curtailed bank lending and a record rise in the prices for oil and other commodities. Policy makers estimate U.S. gross domestic product will increase by 0.3 percent to 1.2 percent this year, compared to the 1.3 percent to 2 percent growth they predicted in January, according to Fed records released today. Consumer prices, minus food and energy costs, (a ridiculous barometer of inflation if ever there was one) are projected to rise by 2.2 percent to 2.4 percent.

Stagflation has arrived and yet there continues to be a ‘hear no evil, see no evil' and head in the sand attitude and a wishful thinking that these conditions will soon disappear and we can return to the “good” decade of the 1990's. While we all hope for such an outcome, the reality is likely to be much different as the benign financial and economic years of recent history degenerate into a far less benign and challenging financial and economic era.



This new era will be marked by low or no growth and high inflation and gold and silver's finite qualities will come into their own again. Real diversification and risk aversion remains essential.

Today's Data and Influences
Today sees the release of Weekly US jobless claims, with economists forecasting a total of 375,000 new filings compared with 371,000 in the prior week.

Silver
Silver is trading at $18.02/18.07 per ounce at 1100 GMT.

PGMs
Platinum is trading at $2187/2207 per ounce (1100 GMT).
Palladium is trading at $453/458 per ounce (1100 GMT). 

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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