Gold Rallies as Deflation Now is Set to Turn to Inflation Later

By: Mark_OByrne

Gold rallied for a second day yesterday on concerns regarding the deepening US recession and the dollar. Gold has continued to rally in Asian and early European trading. The bounce in oil prices is likely lending support as is continuing robust physical demand internationally. Asian equity markets were largely positive overnight but European ones are again under pressure this morning.

The global deflationary spiral appears to be accelerating as is desperate attempts by politicians and central bankers to reflate their way out of the recession. The White House and congressional Democrats reached an agreement in principle on a $15 billion proposal for bailing out U.S. automakers yesterday – the latest in many recent humungous bailouts. The real risk as yet barely acknowledged in the markets is that the “inflate or die” and unprecedented money printing internationally will lead to a significant inflationary shock in the medium to long term.

The credit crunch bailout has led the US government to the creation of some $8.5 trillion in just a few weeks. To put this into context, World War II cost $3.6 trillion and the Iraqi invasion $0.6 trillion. And the liabilities of the US government (Social Security, Medicare etc.) going forward are even larger with some estimates as high as $50 trillion.

These huge liabilities will likely be paid by massive credit creation and the devaluation of the dollar.

The end result of this unprecedented government spending and dollar devaluation will be inflation – the question is not will we have inflation, rather when and how severe.

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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