Asian inflation data supports buying of gold and silver
Posted on 03 June 2008 with no comments from readers
Middle East and Asian countries have failed to remove price controls and subsidies on energy further stoking up rising inflation rates. This they have imported courtesy of the loose monetary policies of the Fed which are producing negative local real interest rates.
The problem with price controls and subsidies is that they distort consumption patterns, and then supply and demand in the unregulated sector settles at higher prices. Consider the $1.77 I pay for gasoline in Dubai. The price has actually risen but not nearly enough to make me consider changing my gas-hungry Mercedes SUV for a smaller car.
This problem is magnified across the Middle East and many Asian countries, including the most rapidly growing energy consumer countries China and India. It is increasingly the same story for food where poorer countries think they are acting intelligently by imposing export bans and quotas.
Distorting free market supply and demand patterns for food will keep prices higher and markets shorter of supply than otherwise. One person will eat while another goes hungry.
That means inflation is heading higher, and it is inconceivable that so many disparate regimes across the world are going to get their act together and take collective action. It is the old problem that inflation once out of the bag is difficult to get back in again. You start a forest fire and you have to wait for the forest to burn down.
The Fed is also highly unlikely to raise US interest rates sufficiently to snuff out this blaze. The US has big macroeconomic problems with huge indebtedness challenged by falling house prices and a financial system stuffed full of derivative products. Allowing banks to fail in this environment would bring the system crashing down and low interest rates are essential to bail them out.
So it looks as though the world is stuck with high inflation again, just like in the 1970s because that is where we have ended up. This is a multi-year phenomenon and only a few asset classes offer significant protection. Step forward precious metals: gold, silver, platinum, palladium and their producers, and the valuable explorers who own the land for future production.
no Comments posted by readers:
OK, supposing I were a private individual who had GBP10,000 and wanted to “buy gold”.
How would I do it without being ripped off for commission and other charges, to such an extent that it isn’t worth the bother?
And where would my gold be stored? Under my mattress? Or somewhere else that would no doubt charge me for doing so?
Would the answers be different if I had GBP100,000 or GBP1,000,000?
The Perth Mint is your best option.
The Perth Mint has come under severe scrutiny recently by Jason Hommel at http://silverstockreport.com/ssrarchive.htm, in a series of articles throughout May this year. I have no personal experience with Perth Mint, but would raise two points. One, with Perth Mint you get a promise, not physical gold. Two, if we acknowledge that government is the problem, not the solution, why entrust your savings to an entity guaranteed by the government of Western Australia? And what’s wrong with a mattress anyway?
Yes I have read his comments which seem nonsense to me. There is a modest delay between turning unallocated deposits into allocated bullion – so what? The reason for keeping your precious metal in a government-owned vault ought to be obvious – safe keeping. Would you trust a private sector firm not to run off with your gold? Are you really happy leaving bullion for a burglar to find in your home? A 100% guarantee from the richest resource base in the world seems worth having – and if that failed we would all be dead anyway!
Of course if you naively believe that a government entity is a trustworthy repository for your assets, by all means place them in their custody. That Australia is resource-rich is a gross irrelevance, as you would realize had you thought about it for more than a nanosecond. As for private sector trustworthiness, it would depend on the firm, wouldn’t it? Just a couple of days ago it was reported that police seized private safety deposit boxes in London, a frightening invasion of privacy under the guise of law enforcement. Not scary to you, of course, who have great faith in the integrity of governments. As for keeping bullion in one’s home, it’s true that if you hung a sign outside saying “Gold under mattress” you might be at risk. The alternative is to keep your trap shut, and buying a safe. Oh, and I’m no fan of Jason Hommel in general, but the points he raised deserve far more respect/analysis than your cavalier dismissal.
Sorry but I have given great attention to his comments and still decided to invest in the Perth Mint myself.
Hey, don’t feel the need to apologize to me! But you may be interested in these words of James Turk, admittedly a competitor of Perth Mint, but no less valid for all that. From Mish’s Global Economic Trend Analysis:
“Minyan Mailbag: How Safe Is My Gold?”
Quote:
“Lastly, regarding the Perth Mint reference, I would just like to point out that one does not own physical metal when they own a certificate. They instead own a liability of the firm issuing the certificate, which is why the Perth Mint certificates come with the guarantee of the government of Western Australia. Each individual has to decide whether that guarantee is sufficient incentive for them to own the Mint’s liability instead of actual physical metal. In other words, a “certificate” is not a “storage receipt”. Unfortunately, many people do not understand the difference.”