Where is the Inflation? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 18 April 2013
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- By Asad Dossani, Author, The Lucrative Derivative Report


Asad Dossani
As most of you are aware, gold crashed earlier this week. Gold has experienced over a 12% drop in recent days, and many investors are worried about what is going on with the gold price. Why is it crashing? Since gold's peak, it is down around 25%, official putting the commodity in bear market territory.

Before we answer why gold is crashing, let's look back to gold over the last few years. Rewind back to 2008, when the financial crisis first began. Gold was trading at around $800. At this time, due to what was going on in the global economy, the US Federal Reserve began its controversial policy of Quantitative Easing (QE).

Since QE was first implemented five years ago, it has expanded in the US, and been pursued by other central banks. Over this period, the logic for owning gold worked as follows: Due to QE, inflation is going up and paper money will lose its value. Thus, one should own gold, as gold cannot be printed and will therefore be a better store of wealth.

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And so, gold began its upward run, starting from $800 in 2008 and peaking at over $1800 dollars in 2011. In the space of 3 years, the gold price more than doubled as investors bought the commodity as a safe haven. Even with the most recent fall, gold is still up over 70% in the last five years.

Why exactly is gold crashing? There is one major problem with the logic for gold going up over the last few years. I'm talking about inflation. Unlike many predictions, QE has not led to significant increases in inflation.

Despite the Fed's many rounds of QE, US inflation is less than 2%. The Eurozone's inflation rate is also under 2%. Japan, which has some of the loosest monetary policy in the world is actually experiencing deflation. India, despite a much tighter monetary policy and no QE whatsoever, has inflation at 6%. What is more is that most countries have seen a fall in inflation rates over the last couple of years.

What this should tell us is that the link between QE and inflation is not as clear as we think. There is no evidence that more QE leads to inflation. So why is gold falling? Well, gold went up because people thought inflation was going to spiral out of control. That hasn't happened, and as a result gold is now retreating Maybe the better question we should ask ourselves is: Where is the inflation?

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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9 Responses to "Where is the Inflation?"

sheetal

Apr 21, 2013

So, where is the inflation? Well presented with no answers, I guess everybody is asking that question and can anybody provide some answers pls.

Like 

Pramod Phadke

Apr 19, 2013

It is not correct to compare QE programs of western countries with India. Without saying so, India has been printing paper money for several decades now.
This, in my opinion, has created a lot of black money and a parallel economy. Hence, the inflation is high.
In western countries, there is practically no black money worth taking cognizance of. The inflation is hence low.

Like 

Ilango.K

Apr 19, 2013

Hi Asad ,
The potential for the basic demand from the common man and the money available with the common man in india is the reason for inflation , whereas the basic demand does not change much in US and Europe which is the reason for the low inflation .

Like 

Rajesh

Apr 19, 2013

LoL!! Mr. Author, Have you ever been to a grocery store to purchase anything ? Your answer to 'Where is Inflation' lies there.. Go and find out.. FYI, Food Inflation in India is 15%..

Like 

Kuldeep Nayar

Apr 19, 2013

Mr. Dossani, I have not understood your logic. I am not an economist but an engineer. When you have unlimited money supply, the value of money has to go down. When you have too much of a good thing, how can it retain its value. This story has been told to me by a 85 year old man. He went to England in 1952 and got fully kitted on Saville Row. He paid a sovereign. Today, too this would cost a little more than a sovereign. So, in terms of Gold, inflation is minuscule but in terms of money ....? Would appreciate a response from you and please convince me that I should not invest in Gold. Also, China, the fastest growing economy in the World, has 6000 tonnes, second only to the US. Why is China buying gold hand over foot?

Like (1)

Lakshminarayanan

Apr 19, 2013

I would own gold for one reason... it cannot be confiscated by Governments unlike a deposit, which can be confiscated (or haircut if you like) as was done in Cyprus.

Like (1)

Bitten by Inflation

Apr 19, 2013

Where is inflation ?

Which world do you live in ?

Please check the price of food (grains, vegetables, pulses, food products, etc. etc.), petrol, diesel, USD-INR rate, ie, the items that affect every mango man's day to day life.

Like (1)

Civilian

Apr 19, 2013

Maybe the better question we should ask ourselves is: Where is the inflation?

The inflation index of the govt does not capture the actual inflation data. Inflation due to money printing need not be in food products or consumer products alone. Food and consumer products inflation has been kept under check due to direct subsidies, masking the actual agricultural cost through input subsidies. As Govt's subsidize all commodities which make up the inflation index basket the only place left for inflation is in properties, rents, services and equities. Every bit of property in the world has risen, electricity bills have increased, commodities have risen, art has increased, Christie's auction prices have increased, defense equipment cost has increased. Services including school fees, transport, haircut, cleaning, pest-control, tuition fees, maid services, driver costs, taxi service, bus fares, repair services, security services, lawyer, doctor, consultant services have increased.

Just because inflation basket does not capture all the cost does not mean there is no inflation. Some day when inflation has exhausted the scope to increase in above sectors it will start to raise in core basket areas maybe by 2014-15 years. Then as nations squeeze, there will be no place to run and hide.

Regards,

Civilian

Like (1)

Prasad

Apr 18, 2013

I think the author doesn't go to the grocery shop regularly. Have you heard of CPI Mr Dossani?

Like (1)
  
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