The last couple of days I’ve been talking about the very heavy drug the FED is using inflating the economy with US dollars. This was not money the FED owned, this was simply printed.
Taking the effects of the money multiplier into account, every dollar brought into the system will result in 10 dollars extra in the system. (assuming a 10% ratio, the actual amount banks keep risk-free is normally around 8 or 9 per cent)
Ever since the start of the credit crunch the monetary base increased by 1100 billion USD.
According to our money multiplier this will result in an increase of the M3 by 11,000 billion USD. An increase of 11,000 billion within an economy whose GDP is around 14,000 billion… You don’t have to study economics to understand this will lead to inflation on the long term.
Normally it takes about three years before the results are seen in the real economy, since the FED started printing (extra) money in the summer of 2007 the effects will probably reveal itself somewhere within next year. (possibly a bit later since the banks have been very careful with new loans)
I suspect the rise in the gold price is caused by anticipation of the inflationary pressures.
There are a lot of people stating that gold now is overbought since the price has increased and increased in the last few months. ‘New records’ have been set for the gold price and according to some people a very heavy correction is highly probable. However: those analysts are looking at the nominal price instead of the inflation adjusted prices.
I would like them to take a look at this graph:
It shows the inflation-adjusted gold price throughout history, showing we are around 50% away from the all-time high!
Gold is taking a more and more important role within investors portfolios and I think this is good: there is more than enough space left for gold to climb in price, way more than the space for the S&P to climb.
But more about that tomorrow…
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