Gold may spike to $2,000 per ounce in medium term due to inflation

November 15, 2008 by · Leave a Comment
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I know everyone loves to repeat deflation, deflation, deflation and I do agree that sounds attractive for people who are not underwater in debt and have substantial savings.  In the short-term we will see deflation because of the immense destruction of credit in the global financial system.  The money & credit was needed to support the price level of all the various assets classes.  When that is taken away, price levels will fall until they find a proper balance and stabilize. This is based on supply and demand along with other statistics.  During this process, production of various goods will be reduced because these companies relied on the money & credit to fund their operations and expansion and the destruction has created a constrained and limited demand market.  Also the consumers have their ability to purchase goods & services impaired by the reduction of available credit.  

Producers will also bring unprofitable production offline if current prices of different commodities fall below the cost of production itself.  This can create a delay if more demand arrives before production can be brought on to meet demand.  If the consumers saved portions of their income then they would be able to sustain a certain amount of purchasing power.  In high savings rate countries you will lessen the impact of the various slowdowns.  In a country with a negative savings rate like the United States, you will see purchasing power fall off quickly when their is a lack of available credit without outside interference (ie: stimulus programs).  What we have now is people panicking because prices are falling, without understanding what is causing this phenomina 

Longer-term as the economy stabilizes, you will see confidence return and with that, consumers begin to want to spend and expand.  Banks will want to capture part of this growth and lending will begin to pickup.  During this period, there will be a lag between production coming back online and people using the available resources to gather more and increase the workforce.  This is where the inflation creeps in and price rise because we will have limited resources available and increasing demand for those resources.  Gold will see this happen like many other resource asset classes.  People are ignoring this part of the equation and that is where the real cost of all these social programs, bare their costs.  

With all this credit pumped into the economy, that money will have to be invested somewhere and that is no guarantee that another problem might break people confidence again.  This whole system is built on trust and if that is broken severely, it takes a long time if ever to fully repair it.  We have more debt outstanding than equity worldwide and some people are winners and other are losers.  If you look at what should of happened, many large companies should be bankrupt and a major transfer of wealth should of occurred, not by force but by making the wrong decisions and now this is what the consequences are.  Instead we are trying to bail out the people who created the problem, just so they can keep their relative advantage over everyone else.  A sad system of affairs if you ask me.

Here is a Video of Johann Santer, MD at Superfund Financial Hong Kong talking about inflation & gold