Gold and silver prices break out as a classic hedge to inflation from rising oil prices and money printing

Posted on 19 June 2014 with 4 comments from readers

Silver tripped across the $20 an ounce line this afternoon and gold prices added $15 to rise to $1,287 in the wake of a Fed statement yesterday that appeared to indicate more inflation was in the works than presently expected and no plans to do anything about it. The degeneration of Iraq into a state of civil war is also pushing oil prices higher which has direct inflationary consequences on transport and industry.

This is exactly the inflationary scenario that author Jim Rickards warns about in his new book ‘The Death of Money’ (click here) though he might already be wishing his portfolio allocation had included more gold and silver.

Inflation

So far the global financial markets have avoided a correction. But they surely cannot stand up to much retail price inflation before giving up some of their recent increases in value. For higher energy prices act as a tax on both the consumer and producer lowering sales and profits.

It gives you a cover in case on any systematic risk. Try this out to understand it better.

Hedging is not diversification and these are two very separate things. Both the methods are used to minimise the risk and thus this adds one more point to investing or trading. You cannot eliminate risk completely.

Nominal inflation hides some of this damage but it’s pretty unpleasant under the hood.

The worry is always that the central banks have kept on printing money just a little too long and that the obvious ‘unexpected consequence’ follows with a rising supply of money and a more limited supply of goods leading to price inflation. The wonder is that this has taken so long.

However, the chance of the Fed or any other of the central banks which have joined in the money printing party – Bank of Japan, Bank of China and the Bank of England to name a few – getting the exit strategy right is about nil. They know that and their preference is for inflation rather than destructive deflation.

Bottom spotting

Anybody who read the ArabianMoney confidential investment newsletter for this month will know that we spotted June as the bottom in the precious metal cycle (subscribe here). We are therefore not surprised to see this happening.

However, we are surprised by the turn of events in Iraq. With temperatures soaring this time of year even the hottest heads usually cool down. Not so this year and the impact on oil prices just adds fuel to the inflationary fire.

The next conundrum will be to try to predict how far and how fast gold and silver will rise. Maybe that can wait for the next newsletter. It’s nice to be right about the breakout first…