Buying in to Gold

cgnao

The only growth I see at the moment is in 1) The money supply 2) Easy credit 3) Government spending 4) Budget and current account deficits.

Contrary to what governments would like us to believe, the increase in prices is an effect of inflation, not the cause, and shows up later in the cycle. Inflation is when the government expands the money supply, which is what is happening now. Where else do you think all these 0% finance offers come from?

Quoting Jens O. Parsson’s book “Dying of Money”, which narrates the story of the German hyperinflation of 1923-24:

“Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays. That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of al traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”

Protect yourself.

deemy2004

Inflation ?

What inflation ?

Last time I looked it was 1.5%

With UK GDP running at say 3% that gives REAL annualised growth of 1.5%.

Virtually all developed countries have positive GDP growth AFTER inflation, and developing economies such as China with REAL GDP growth of more than 4% !

How is what happened in Germany in 1923 relevant to the UK in 2004 ? That was obviously related to the mess coming out of WW1.

We are so far from a state of hyper inflation that there would literally be years of warning before we even began to reach that stage. I.e. the BOE is jumping up and down like a demented rabbit just because it wants to meet a 2% inflation target 2 years forward, let alone what it would be doing if it thought an inflation rate would be > 10% !

Reaper

An interesting discussion, if a little circular.

The 1930's depression has been mentioned as an example of what had happend and could happen again, so let's start with what caused it:

1) Stock market prices rose excessively. People invested just because the market was going up, not because the underlying investments were sound.
2) Governments reacted by reducing money supply. Bad move.
3) Governments reacted with protectionism killing world trade. Bad move.

Now point (1) has happened repeatedly and will go on happening. Markets do get carried away and then fall again, but it is nothing to get excited about as long as you are investing for the long term.

As for government reactions - they are now much more aware of what effect their actions have and are not going to make the same mistakes again. You will notice how quickly interest rates always fall at the first sign of trouble.

So my point is there will be crashes from time to time but no financial meltdown. There just isn't the driving force out there to make it happen.

So what about gold? I'd say buy it by all means in the short term on those occasions when you think the markets are due for a sharp fall. However it makes no sense to hold it long term. If I put money in shares that helps a company invest which (hopefully) they use to grow. Gold doesn't grow, gold doesn't invest, gold just sits there doing nothing. It's price is related purely to supply and demand.

So in conclusion buy gold if you want a short term defensive option, but invest elsewhere for the long term.

nitrocat

Dreemy

Last time I looked it was 1.5%

Depends upon which measure of inflation you use.
Have you noticed any house price inflation for example? Well bad news - It is excluded from the official inflation measure of 1.5%.

4% - maybe
http://www.statistics.gov.uk./pdfdir/cpi1204.pdf

Dreemy

We are so far from a state of hyper inflation that there would literally be years of warning before we even began to reach that stage.

Ask the Argentinean people about how much advance warning they had in 2000.

Dreemy

let alone what it would be doing if it thought an inflation rate would be > 10%

I believe they see it coming, due to peak oil production and all that.

Reaper

So my point is there will be crashes from time to time but no financial meltdown. There just isn't the driving force out there to make it happen.

The G7 countries (UK etc) world as we know it is suffering from general price deflation due to cheap labour elsewhere. The central banks are broadly inflating like crazy to counteract it. The sickness being deflation, the cure being inflation.

The administered cure (inflating money) may or may not work, and will have side effects like housing bubbles, commodity bubbles etc, ruining the incentive to save cash.

Look at the BoE web site; their sole aim is stability. That is stability of the banking / government infrastructure. They will hyper-inflate if they believe it is needed to keep the stability of their control. And if stability of monetary worth was their real aim then they have already failed without an inflation target of 0%, and meeting a 0% inflation growth/fall.

http://www.bankofengland.co.uk

The question is; can they counteract the cheap populations of the world by inflating? IMO They are trying to, China and eastern europe, is a gigantic deflation challenge to counteract.
Can they hyper-inflate when there are finite resources of oil? IMO Yes they can.

Because we are currently suffering deflation it is possible that gold price in UK£ may go down until the £, $ etc are worthless. It may also go up like houses have, as an side effect of mass inflating.

Wake up

Welcome to the financial matrix.

deemy2004

The only developed country that I know of that has actually suffered recent deflation is Japan. The rest if the world is inflating as per the inflation indices.

For an investor deflation is GREAT ! I.e. buy Government Bonds and watch deflation increase the purchasing power of your investment with interest on top !

Reaper

The G7 countries (UK etc) world as we know it is suffering from general price deflation due to cheap labour elsewhere. The central banks are broadly inflating like crazy to counteract it. The sickness being deflation, the cure being inflation.

I don't agree. Governments don't want inflation. Putting interest rates up is the main way to stop inflation and that is what they have done to the limit that the economy can stand.

Now when you talk about deflation I think you are saying the economy is shrinking. This just isn't true. It has been weaker recently (which is why I think interest rates have peaked for the time being) but it is still growing. Look at the GDP stats if you need reassurance.

And if stability of monetary worth was their real aim then they have already failed without an inflation target of 0%, and meeting a 0% inflation growth/fall.

0% inflation is impossible as there is a degree of structural inflation built into the economy, in the same way that zero unemployment is impossible. If ever you hit 0% inflation it would mean recession as the economy would have to be shrinking at the same amount that structural inflation was pushing prices up!

Since I neither accept we are in a period of deflation, nor that the government is trying to cause inflation that means I do not believe your doomsday scenario is likely.

Believe me if the government wanted inflation it would be easy. Printing billions more £50 notes and offering all civil servants 200% pay increases would achieve it in weeks!

Walletwatch

Dreemy
Depends upon which measure of inflation you use.
Have you noticed any house price inflation for example? Well bad news - It is excluded from the official inflation measure of 1.5%.

4% - maybe

That was a controversial decision alright to change the inflation index against which the UK inflation figure would be tracked (RPIX vs HCIP), but it doesn't mean the BoE isn't responsive to the housing market price rises. They actually started off with Mervyn King saying sometime December last year that they would only involve themselves in inflation monitoring, and not have anything to do with the housing market. Subsequently, they've all come to accept the fact that they cannot relax a vigil on the house prices. Else it wouldn't explain the BoE increasing interest rates four times since Jan this year by 25 bps, inspite of an avge inflation figure of 1.2%, much lesser than the targeted 2%.

To summarise, the BoE is adequately responsive in my opinion to inflation figures, both the quantitative indices against which they are evaluated, as well as other indices that include house prices. Why, I was actually reading a couple of articles today, that seemed to indicate that the current dovish attitude to interest rates would probably change to a more hawkish one because the inflation rate in Nov was as high as 1.5%!!!

I call that over-reacting, but there you are... the slightest hint of an increase in inflation acts like a pin-cushion to the BoE.

cgnao

Inflation ?

What inflation ?

Last time I looked it was 1.5%

Excerpt from an article by Paul Tustain:

"Our central banks may have been concentrating hard on inflation - but only on retail price inflation as measured by retail price indexes, which is concerned with shoes, food, holidays, consumer electronics, cars etc; a series of things which most of us like, but which don’t hold value. If we are trying to measure the tendency of money to fall in value this is only half the story because money buys more than retail goods, and two of the more important things it buys are (i) houses and (ii) unearned income for our retirement. For much of a productive life the cost of buying these two things exceeds half the average consumer's net income, yet both are left out of inflation figures based on retail prices."

Protect yourself.

nitrocat

Dreemy, Reeper, Walletwatch, Valid points maybe. But also pretty much the brainwashing propaganda that is spewed out by the media.

Walletwatch -

Else it wouldn't explain the BoE increasing interest rates four times since Jan this year by 25 bps, inspite of an avge inflation figure of 1.2%, much lesser than the targeted 2%.

I interpret this as that the BoE do not believe the inflation figures either. Try telling a house first time buyer that inflation is only 1.5%. Or a retiree on fixed income.

Reaper -

economy would have to be shrinking at the same amount that structural inflation was pushing prices up!

And then you have general price stability and savings retain value. A good thing maybe.
BoE quote “This is part of the Bank's objective to 'maintain the integrity and value of the currency' - to achieve price stability in the economy.”
http://www.bankofengland.co.uk/ab_bank.htm
Question to the BoE. Prices have been going up for a long time, they are not stable. Are you are failing your objective?

Reaper -

Now when you talk about deflation I think you are saying the economy is shrinking

Not quite, I believe that China, India, Asia for example are strong forces of deflation acting to reduce everyone in the UK net worth (globally speaking) by competing with UK wages. BUT the bankers are trying to counteract it by inflating. I think they are doing very well at it btw, and suspect they will for a long time yet, until the inflation leads to too much mal-investment and over consumption (the peak oil production wall is a problem). Overall summing up our economy we have inflation, because the forces of deflation are being easily nulled by the mass flooding of money into the economy, plus they like to finance a bit extra like wars >:(


Dreemy -

For an investor deflation is GREAT ! I.e. buy Government Bonds and watch deflation increase the purchasing power of your investment with interest on top !

Deflation maybe great if you have total net worth ie savings and no debt. Deflation is very bad if you have a total of debts. How much average debt now per person in the UK? I think I read between 20 and 60 thousand pounds (depending upon who you spread out the debt to eg children). = Lifetimes of debt slavery trying to pay it off on low deflated wages.
No way will they allow deflation to win, as it is an instant political career killer. They are much more likely to hyper-inflate or default if needed.

Gold may not ever become true money again, however gold has a fascinating role in finance even today, and history sometimes repeats itself. Because of that may become a terrible or super investment. Read the GATA site for more intrigue of manipulation.

All the above is only in my opinion etc.

All the above is only in my opinion. I am probably wrong etc.

deemy2004

Excerpt from an article by Paul Tustain:

"Our central banks may have been concentrating hard on inflation - but only on retail price inflation as measured by retail price indexes, which is concerned with shoes, food, holidays, consumer electronics, cars etc; a series of things which most of us like, but which don’t hold value. If we are trying to measure the tendency of money to fall in value this is only half the story because money buys more than retail goods, and two of the more important things it buys are (i) houses and (ii) unearned income for our retirement. For much of a productive life the cost of buying these two things exceeds half the average consumer's net income, yet both are left out of inflation figures based on retail prices."

Protect yourself.

Youve lost me

What point are you trying to make ?

Property/ pensions / savings are assets and yes should not be included in inflation.