Consumer prices aren't the only kind of inflation

Jul 2, 2013

Zurich, Switzerland

Zurich is a delightful city. So much history! So much beauty! So much money! You can barely walk through a kruggerand in any direction without hitting a rich banker or his model wife.

They stroll along the Limmatquai. They dine at the Kronenhalle. They shop on the Bahnhofstrasse.

And what do they think of today's markets?

"It's crazy what is happening," said our friend. "But crazy things happen. You just have to make sure you're not doing something crazy too."

What crazy thing happened yesterday? The Financial Times says stocks rose when investors got good news from the manufacturing sector.

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We noticed a big bounce in gold. The metal was up $32. The gold miners showed even more gains.

Whassup? End of the correction in the gold market?

Only a fool would pretend to know where gold will come to a bottom. We guessed $1,100 yesterday. Chris (who gives his market insights) thinks it could be lower.

Nobody knows. But a lot of people think they know. And when people think they know something that they can't really know, it is an opportunity for those who don't know and know it. Is that clear?

Our old friend Mark Hulbert reports that independent financial advisors have never been more bearish on gold than they are today. Other indicators tell us that the public and the professionals are overwhelmingly against the yellow metal...

Even at the "top" - when gold was near $1,900 - few people actually owned gold. It was considered kooky. Bizarre. Vaguely seditious.

Since so few people owned it, few were unhappy to see it go down. And when it did begin to correct, all those investors who had jumped into the gold market at the last minute, because they didn't want to be left behind, thought they should get out immediately. Their rush for the open door is what brought the sharp sell-off.

Meanwhile, serious investors are not speculating on the next move of the gold price. They're accumulating gold...and measuring their wealth in it.

We've heard investment professionals recently tell us that gold is no longer necessary. It's just a hedge against central banks' going wild, they say. And now that the Fed has demonstrated its willingness to 'taper off,' there is no need for gold, especially when consumer prices aren't rising.

But consumer prices aren't the only kind of 'inflation.' Nor are they the first kind. The first kind of inflation is the kind that raises values for the lucky 1%. People who own capital assets - stocks, generally - see their wealth increase as the authorities pump money into the banking system. That's the kind of inflation that most people like. Even if they aren't part of the 1% and don't own stocks they are happy to see a bull market on Wall Street. They imagine - like Ben Bernanke - that somehow this 'wealth' will trickle down to the working stiffs.

They're right. It does seep into the consumer economy, eventually. But not as wealth. As anti-wealth. Prices for toilet paper, parking spaces and cookies increase. The working stiffs end up with lower real purchasing power.

We're not there yet. Consumer price inflation is still - apparently - low. And it looks more like a period of disinflation than real inflation.

In fact, we're so far away from consumer price inflation that investors can't see it coming. They think the feds have everything under control. They think the economy is fundamentally sound...and that monetary policies are fundamentally sensible. They're betting that Mr. Bernanke & Co. can work things out with Mr. Market...

We don't approve of speculation...not in gold and not in anything else. Most people - including us - don't have the stomach for it.

Instead, stick with the program. Put your money to work the way serious people do. The way the Swiss do. If you haven't done so already, begin a lifetime program of gold accumulation, not gold speculation.

Set aside some amount...and buy gold every month. And hope the price goes down so you get more for your money.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Consumer prices aren't the only kind of inflation"


Jul 3, 2013

Accumulate is the right word, as no metal can replace gold,and the supplies are shrinking.Right now,there is a bounce in price,according to the charts,so put 10% of your disposable income,right now.There are resistances,ahead ,in the charts,when it come down again,keep accumulating.

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