Tag Archives: wrong inflation numbers

Incorrect Inflation and Gold – part 2

We’re continuing with our discussion about incorrect inflation and gold in this article.

U.S. CPI data shows a significant increase in inflation since the 1970’s as displayed in the graph below.

inflation-gold

Source: U.S. Department of Labour

But even though something clearly has happened with CPI growth we are still hearing reports about inflation not being very high. Official numbers actually show it being in the low single digits. This seems to contradict what regular people on the street are experiencing, where the consensus view is that prices on close to everything is increasing. The question is why?

CPI, or inflation, can be measured in different ways and sometimes the measurements change – at the discretion of the government. Comparing the CPI number based on the methodology used by the U.S. government prior to 1980 with today’s official CPI numbers reveals some very interesting differences – as illustrated by the graph below.

gold-inflation

Source: www.shadowstats.com

Official U.S. inflation is below 2% today and the alternate inflation methodology displayed in the graph above puts in closer to 10%.

Can inflation really be that high?

As we discussed in the first part of this article it will vary depending on your own lifestyle, but needless to say most people have a hard time coming to terms with a 2% inflation rate when they’re getting less and less for their money. Independent surveys put the perceived rate of inflation in the U.S. closer to 4-6%.

So once we ascertained that inflation is higher than official data shows, two questions come to mind. Why is that and what impact does it have on you?

There are many reasons for the government to prefer lower inflation numbers. Part of it has to do with confidence in how an economy is run. A sky high inflation rate signals that something is amiss. It also has to do with costs as many benefits etc. are indexed to CPI. A high CPI growth thus means higher costs for the government and vice versa. At a time when many developed, as well as emerging nations, are heavily indebted it’s not far fetched to assume that there is an interest in keeping costs down, maintaining faith in the currency and keeping interest rates low.

This all means that your fiat money is loosing its value at an ever increasing pace. Inflating away debt, which is what most governments are doing, is a stealth way of stealing your money. It doesn’t affect the rich as much as it does the poor and middle class – who are loosing purchasing power, having to spend more and more on food, transportation etc. – without the means of benefiting from rising asset prices.

When it comes to investments and savings you will have to pay attention to what the real rate of return is. This will have a serious impact on your wealth.

Most interest rate investments give a negative real return today. For example, the 10 year U.S. Treasury yield is 2.50%. If inflation is running at 4-6% it means you are loosing money.

Stocks are overall performing well currently, but they are very volatile, moving 5-20% in single trading session – so capital gains is not a sure thing. Dividends may in some cases be above the inflation rate but picking the right stocks and keeping them for the long term is not that easy.

That leaves us with gold and silver bullion, which for centuries have preserved value and protected purchasing power.

Given how worrisome most economies look today there is no reason for why you shouldn’t consider buying gold and silver bullion or adding to your holdings. Especially, since prices recently have dropped to levels that again look attractive.

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Incorrect Inflation and Gold – part 1

Conceptual image - percent growth

Conceptual image – percent growth

Inflation is often cited as a measurement closely linked to gold and silver. There are however some misconceptions as to what this relationship looks like and the dynamics of how it works. In this post we take a look at incorrect inflation and gold.

In economics the definition of inflation is the price increases on goods and services in an economy over a period of time. These prices can increase with different speeds depending on the velocity of money.

Every persons perception of inflation varies depending on what their life looks like and what habits they have. If you travel to work by car for longer distances and thus have high transportation costs or if you have a big family and have high food costs, then chances are that your perceived increase in costs will be higher than someone with another lifestyle.

Typically, inflation is measured through CPI (consumer price index). The CPI index is based on a basket of goods and measured annually. So, the CPI growth shows you what you need to spend to keep a constant standard of living through out of pocket expenses. A high inflation number means that things will cost more and vice versa.

Inflation is of importance to you because it will give you an indication on how much the costs of goods and services are increasing in an economy – thus showing you how much more money you need to spend or make. Ideally, you’d like for your own income to match the growth rate of inflation to maintain a real increase in your wealth or purchasing power.

Inflation is also important because it gives you an indication of how quickly your fiat money is loosing value – becoming diluted – or debased.

Gold is tied to inflation because it holds it value over the long term – in fact better than any other asset.

In his book The Golden Constant, Roy W. Jastram explains it likes this:

“Since the 14th century, gold’s purchasing power has maintained a broadly constant level. To put this in practical terms, an ounce of gold has repeatedly bought a mid-range outfit of clothing. This was true in the fourteenth century, when an ounce of gold was worth £1.25 to £1.33; it was true in the late 18th century and it remained true at the beginning of this century (2000 to 2008), when an ounce of gold averaged £269 or $472. Even the exchange rate between gold and commodities has been relatively constant over the centuries.

On the other hand, the US dollar that bought 14.5 loaves of bread in 1900 buys only 3/4 of a loaf today. While inflation and other forces have ravaged the value of the world’s currencies, gold has emerged with its capacity for wealth preservation firmly intact. Being no one’s liability, gold exhibits the same wealth preserving qualities in the face of financial turmoil, earning a reputation as a crisis hedge in addition to its credentials as an inflation hedge.”

So to summarize: gold is not a perfect intermediate inflation hedge but it does preserve value excellently over the long term, and excels during periods of hyper inflation.

The question is if we have any inflation to speak of at all today? That’s what we’re looking closer at in part 2 of this article.

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