»The Daily Reckoning by Bill Borner

Where is the Inflation?
18 APRIL 2013

- 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?

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