Inflation may have hit its peak, but goldbugs still have a reason to hold

Suddenly, inflation is back in the news. Last week, the UK figure edged up to 2.9pc. In fact, this was a bit less than expected and it looks as though the peak may have been reached.

Thank goodness. Not long ago, the Bank of England thought that inflation might rise to 3.2pc. (I suspected that when the Bank threw in the towel on its long-held, comparatively sanguine view about inflation prospects, this must be the time to turn optimistic about inflation.)

Escritor: Why are central banks buying gold more desperately than at any time since 1964? Have they taken leave of their senses - or is there something Mr Bootle either does not know or is disingenuously refusing to acknowledge?

ryck: One theory is that banks know that the paper money will inflate while the gold will not in the same terms. That means holding gold is safety for the banks. If the currencies rot away the sale of gold will more than compensate for any bank loses, or so the story goes.  This story is reasonable, at least to me, but there may be other reasons. Places like India are putting a tariff on gold to keep currency outflows down. It was said some place, lost the ref, that the best investment the poor have made in centuries was to buy gold and hold against the rupee inflation. A similar story said that the average return on US home purchases was zero since 1900 due to mortgage costs, taxes, up keep, repairs and such.  We shall see. I bet on inflation hence gold. 

londonhector: because they follow the herd if they were so clever the banking crisis would not have happened

s-i-a: Gold bullion has its value because of its rarity, in the whole of human history only 165000 tonnes have ever been mined. All the gold ever mined would fit in a cube 20m square. However there are thousands of times this amount of "paper gold" in the world. What is "paper gold"?  Well, the answer lies in a simple explanation of how fractional reserve banking works: If a bank holds 100 tonnes of gold it takes a risk and assumes that not everyone will want their gold at the same time and therefore issues gold certificates for 1,000 tonnes or even more. This brings the official price of gold down and brings lots of money into the banks coffers. It is this "paper gold" that is being traded so hectically recently and this also appears to bring the price of real gold down. But everyone with gold certificates together demanded to exchange their certificates for gold, it wouldn't be there. These days to buy physical gold you have to pay a premium above the listed gold price or wait six to eight weeks during which the price may increase This is the start of a disconnect between the price of "paper gold" and the price of the real thing. When this disconnect is complete the price of physical gold will go through the roof. Those holding huge amounts of paper gold are flooding the markets with it in order to drive the official gold price down and thereby scare holders of physical gold into selling. They are then snapping this cheap physical gold up. So, if you have real physical gold, hold on to it and let the fools holding paper and promises play as much as they like. In the long run your gold will be worth many times more in real terms.

The_Ferryman: s-i-a Post of the decade!

rupertmja: Spot on. If the disconnect happens, gold will skyrocket.

marcus_junius_brutus:  IF ?!?

Antiehypocrite: Roger - enought with the gold bug crap please.   I have NEVER in my life held gold - not even jewelery.  But I am holding considerable amounts now - and I am not selling. If you want to know why - just look at this disaster below - the Detroit Mayor says 'at least 100 more cities in the US face this fate' I would suggest that EVERY city in the US and the world faces a similar fate. THIS is what economic collapse looks like - the world is hanging on by it's finger tips - this is why Central Banks lie and print - they know this is the END GAME: 1) At this point, the city of Detroit owes money to more than 100,000 creditors. 2) Detroit is facing $20 billion in debt and unfunded liabilities.  That breaks down to more than $25,000 per resident. 3) Back in 1960, the city of Detroit actually had the highest per-capita income in the entire nation. 4) In 1950, there were about 296,000 manufacturing jobs in Detroit.  Today, there are less than 27,000. 5) Between December 2000 and December 2010, 48 percent of the manufacturing jobs in the state of Michigan were lost. 6) There are lots of houses available for sale in Detroit right now for $500 or less. 7) At this point, there are approximately 78,000 abandoned homes in the city. 8) About one-third of Detroit's 140 square miles is either vacant or derelict. 9) An astounding 47 percent of the residents of the city of Detroit are functionally illiterate. 10) Less than half of the residents of Detroit over the age of 16 are working at this point. 11) If you can believe it, 60 percent of all children in the city of Detroit are living in poverty. 12) Detroit was once the fourth-largest city in the United States, but over the past 60 years the population of Detroit has fallen by 63 percent. 13) The city of Detroit is now very heavily dependent on the tax revenue it pulls in from the casinos in the city.  Right now, Detroit is bringing in about 11 million dollars a month in tax revenue from the casinos. 14) There are 70 "Superfund" hazardous waste sites in Detroit. 15) 40 percent of the street lights do not work. 16) Only about a third of the ambulances are running. 17) Some ambulances in the city of Detroit have been used for so long that they have more than 250,000 miles on them. 18) Two-thirds of the parks in the city of Detroit have been permanently closed down since 2008. 19) The size of the police force in Detroit has been cut by about 40 percent over the past decade. 20) When you call the police in Detroit, it takes them an average of 58 minutes to respond. 21) Due to budget cutbacks, most police stations in Detroit are now closed to the public for 16 hours a day. 22) The violent crime rate in Detroit is five times higher than the national average. 23) The murder rate in Detroit is 11 times higher than it is in New York City. 24) Today, police solve less than 10 percent of the crimes that are committed in Detroit. 25) Crime has gotten so bad in Detroit that even the police are telling people to "enter Detroit at your own risk".

ryck: "2) Detroit is facing $20 billion in debt and unfunded liabilities.  That breaks down to more than $25,000 per resident." Note, also, that since there are only 144 million workers in the US and only half pay Federal taxes we divide 74 million into the total external debt of $17.5 trillion and get some $240,000 for each taxpayer above the median. So, for Detroit folk that pushes it to about $270,000.  Liberal government in action with crooked unions leading the charge to loot the system.  "25) Crime has gotten so bad in Detroit that even the police are telling people to "enter Detroit at your own risk"." This goes for Oakland, Baltimore, Philly, Atlanta, New Orleans, Los Angeles, St Louis, Dallas, Fresno and many other cities in the US. All these cities are controlled by liberal democrats. Is that a hint? We are way past busted and the only sure thing we can say about the future is that the debt will get worse and the crime will too. 

berridgeab:  If your going to quote someone its nice to credit them with a reference. Economic Collapse blog.

ryck: Good essay on gold. The paper gold markets allow leverage up to about 3x for many ETFs but GLD holds to a leverage of 1.00 thereby escaping the downward pressure from those who want to sell their lots.  Bullion is the choice now, but local dealers in my area in the Colonies is spot +%5--about the same as the turnaround on a GLD ETF purchase.  Gold is hovering at a heavy resistance line at a bit less than $1200 per Troy oz. and that cannot hold for ever. Inflation IS a problem in the US in energy and foods and certain commodities. There is no way to avoid inflation due to QE. 

marcus_junius_brutus: Buy bullion - not GLD The banks have massive withdrawals of GLD's actual gold. Also JPM are almost out of gold. Hold the physical metal - and take delivery. A lot of allocated gold in banks actually isn't there. (As the German's recently found out when they tried to repatriate their gold).

ceekaye: I am eternally grateful to the many, many people that have been advising me for the last 2 year to BUY gold. I am also thankful that I didn't listen.  If I had followed that advice 2 years ago I would have lost 30% of my investment to date. An investment in the NASDAQ over that time would have made 30%, or even the FTSE about 20%. I really do understand why people are HOLDING gold, but to buy it, at 1800, 1700, 1600 etc, even now at 1200 seems, quite frankly, mad.  FWIW I think that at some time in the future gold will soar again but I am not good enough to predict when and the fundamentals, technical, in fact everything, points lower before that. But thanks for the advice anyway.

Djenghis:  I understand your scepticism, CK. Nobody is good enough to predict technicals, but everybody should be able to predict fundamentals. As we are living in a world where markets are manipulated, it is hard to predict when the fundamental forces can overcome this manipulation. Fundamentals indicate what is going to happen, they are however not good at predicting a time scale. My view is that Physical Gold will stay roughly where it is for the next 12-18 months or so, ( I'm hoping ), but after that it is anybody's guess. Our Central bankers are desperately trying to hold a broken system together. Yes, a good mechanic can keep an old jallopy going for some years, but there does come a point in time when it falls apart of its own accord. This "falling apart" bit, of our economies will eventually catch up with us, and I would not like to be caught holding no gold at all. Any assets that you have in paper form, can be used as kindling for your brazier.

ceekaye: I agree with your synopsis   , I thought it would all happen in 2009 but now I realise that it's not going to get worse suddenly, there are too many vested interests that will keep printing etc. That could take a decade to work it's way through the system.  In the meantime, I am not willing to give up 30,40,50 even 80% of that investment, even with it's 20+ year timeframe, because that kills me if I've misread the fundamentals.  Even physical stuff has it's downsides, if paper goes, trading using little bits of metal will be inherently more dangerous, liable to confiscation by the same people who now confiscate our paper. Good luck holding & even buying, I will just try to stay liquid enough to keep on moving forwards.

Djenghis: Yes, CK, it is astounding how long things can keep going, even when the floor has fallen out of a market. These Wiley E. Cayote moments do go on for some time, and predicting just when Wiley is going to fall is very difficult if not impossible, but we all know that he is going to fall. Essentially we are all in the same boat. My plan is to get half of my savings (£100k) into physical gold at today's prices. I do not have a pension other than what the state will give me, so I am gambling my retirement on this. Confiscation is an issue, and when push comes to shove, be assured that our police swat teams will be breaking doors down to get at it. Just make sure it is well hidden, and practise lying. The UK economy has already started to fall apart. Things happen very slowly at first, as the forces try to rebalance and adjust, but eventually they just get overwhelmed and things happen very quickly indeed. Look at Cyprus. I bet nobody there went to bed on Sunday night thinking that the banks would not be opening on Monday morning ! Our best protection is in knowing what can happen, and to make at least some contingency plan. We will not save all of our wealth, but we can at least try to hold on to some of it. In 10yrs time, the UK will be a totally transformed place, and it will have more in common with countries like the Ukraine and Romania of today.

chillax:  It's better to be a day early, than a day to late. When the masses of people realise that the store of wealth in Fiat currencies is worth the paper they are printed on [or the 0101010101 in the banks computer] they will seek 'assets' that are proven to retain value over time. Precious metals are one of those. Bear in mind that the change could come overnight and then its too late for you to buy gold. There is a difference between 'the gold price' and 'the price of gold'. When you want to buy physical gold at the low spot price will you find any to buy? Sorry, to late…

ryck: There are other tangible assets to buy with paper money. These include, but are not limited to: fine art, antiques, jewels, antique cars. These tend to increase in value measured in paper terms. 

ceekaye: I agree    but I really don't think it will happen overnight, I don't think it ever has yet with all the catastrophes we have had throughout  history. And if it does, well I just hope I've got enough food & water  stored.  Then again, just surviving in a world full of hate & conflict & people fighting for little bits of shiny metal doesn't seem that appealing.

ryck: Gold coins are a long-term investment. Holding paper is a long-term loser. Check out the inflation stats on all nations that went off the gold standard in the 30s and the US in 1971.  Currency wars are dead ahead. "Paper money eventually returns to its intrinsic value: zero." -- Voltaire

ceekaye: I agree they are @ryck:twitter, like any physical asset, but their utility is the difference between the price you pay for them and their value to you when you come to exchange them for what you really want, a new car, food etc.   My debate here is between holding, which if you have purchased at a much lower price seems very smart, and buying now at a price, highly likely to decrease, in the near - med term. I haven't purchased gold in the last few years for the same reason I haven't purchased UK property. It's value to me.

s-i-a: Early last year the Germans asked to be allowed to inspect their gold supposedly held by the Federal Reserve in New York. The Fed inexplicably refused this perfectly reasonable request. There followed a lot of diplomatic toing and froing but the Fed steadfastly refused to allow the Germans to inspect their own gold. Finally the Germans lost their patience and officially requested the return of 300 tonnes of their gold. The Fed cannot refuse this request but have told Germany it will take SEVEN YEARS to return the gold. Now if the gold is really in the Fed building in New York, how can it possibly take seven years to ship it to Germany? The answer is, of course, it can't. The most obvious conclusion is that the Fed doesn't actually have the gold and must first purchase it before it can ship it to Germany. Obviously the Fed wants to buy this gold as cheaply as possible and so is flooding the markets with paper gold in order to drive the price down so that they can buy the bullion as cheaply as possible. I don't know how successful they will be with this ploy but sooner or later there must be a disconnect between the paper gold price and the physical gold price and the price of physical gold will then go through the roof. If you have physical gold hold on to it. In the long run it will be worth many times what it is worth now.

Jason Aris: Absolutely correct, the fake paper gold certificates (ETF's) are being used to drive down the price to scare the small investor into selling their physical to fill the coffers of central banks (in particular the Fed) in readiness for the collapse of the Fiat paper we are forced to use for currency. They formally confiscated gold in 1933 in the US, in these days of enlightenment of the masses they will not get away with it this time so they have to adopt suruptitious methods to get at people's wealth. If you have physical gold, silver, platinum then keep hold of it.