How global asset deflation will quickly morph into consumer price inflation and higher gold prices
By: Peter Cooper
Wednesday, 3 July 2013
Volatile financial markets make if very difficult for most investors to keep track of what is going on. It can also be very confusing when gold, for example, suddenly loses value for no particular reason and both stocks and bonds sell-off.
That’s because most financial commentators are just momentum followers. They tell you how prices are not moving and do not examine the underlying monetary conditions behind this change.
Why’s gold down?
Higher interest rates, for instance, are immediately blamed for a decline in the gold price. That is the immediate effect. Indeed, any asset with a lower return will be impacted, so we see falling prices for commodities across the board (except oil because the geopolitics of the Middle East), and lower bond and stock prices.
However, when assets are liquidated they are liquidated into cash. Remember that. Central banks will also respond to these market deflations by printing even more money.
Now we have seen a historically huge creation of money by the global central banks over the past five years to combat a deflationary financial collapse, anything between $7 to 12 trillion, the numbers are so big as to be meaningless to most people.
Some of this money has gone into asset price increases. That’s why house prices are so high for the state of the economy and the same is true for share prices. But most of it got stuck in the system on bank balance sheets.