Saturday , 29 April 2017


These 5 Events Will Lead to Higher Gold & Silver Prices

It is my contention that the move in precious metals…[from] late 2008 through 2011 was largely a result of the expansion in central bank balance sheets and the perceived threat of runaway inflation. Since 2011, [however,] we’ve seen economic growth improve and inflation rates across the globe subside. As a result, investment banks and market strategists are arguing against owning gold, and making the case that, with a lack of inflation and an improved economy, the need for owning gold as an insurance hedge against inflation and currency debasement is no longer present. I strongly disagree.

So writes Chris Puplava (www.financialsense.com) in edited excerpts from his original article* entitled The Next Phase in the Precious Metals Bull Market. This excerpt is the first portion of the entire article*.

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Puplava goes on to say in further edited excerpts:

Money Supply Velocity

[As I see it] the assets on the Fed’s balance sheet (from several rounds of quantitative easing, or QE), constitute a substantial source of potential inflationary energy that has yet to translate into meaningful kinetic energy through increased monetary velocity (a measure of how quickly money turns over in the economy) and inflation in the economy – primarily because banks have been reluctant to lend after suffering devastating loan losses after the 2008 financial crisis. Prior loan losses coupled with high rates of unemployment and slow job growth are not the environment that spurs banks to lend, which keeps money velocity low….

This is important to understand, as there is a strong link between money velocity and inflation. Generally, the faster money turns over in the economy, the higher inflation rates climb…With money velocity collapsing in recent years, it shouldn’t be surprising that we do not have runaway inflation. That said, recent changes in bank lending suggests this is about to change.

Unemployment: The Key to Higher Gold Prices

[If, in fact,] the economy is improving (i.e. there is no need for further QE)…banks are likely to accelerate lending….When the unemployment rate falls bank lending generally picks up. The unemployment rate peaked late in 2009 with loan growth subsequently bottoming in early 2010. As the unemployment rate continues to fall, we are likely to see loan growth continue to accelerate ahead.

Trends in bank lending play a pivotal role in money velocity; this is a key piece of data for believing that the next phase of the precious metals bull market lies ahead. The more banks lend, the more money enters the economy and changes hands, leading to higher rates of economic activity and thus higher rates of inflation….

Due to the linkage between money velocity and inflation rates, it is not surprising that bank credit growth also leads trends in inflation…

Just like the bottoming of bank credit growth in 2002 eventually led to a pick-up in money velocity in the 2003–2007 economic recovery, the recent surge in bank credit growth is likely to cause money velocity to rise as banks become more willing to lend.

Conclusion

It is likely that precious metals rallied strongly from late 2008 into their 2011 high, based on the increase in potential energy (size of the Fed’s balance sheet) that was expected to translate into kinetic economic energy and rising inflation rates. However, high rates of inflation have yet to materialize; thus, many are giving up on the inflation thesis for owning precious metals. With an improving economy and record stock market prices the question becomes: “Why own precious metals at all?”

If inflation were more directly correlated to the Fed’s balance sheet and its QE programs, then it would make sense to move away from metals if and when the Fed slows down QE. However, the size of the Fed’s balance sheet alone (potential energy) is not the driver of inflation: it is the banking industry’s willingness to put that money to work—to lend (kinetic energy)—that spurs money velocity, which drives inflation – and results in higher gold prices.

I believe that as focus moves away from the Fed’s balance sheet as an inflation indicator—and a reason to own, or to not own, gold—and shifts to a focus on rising bank credit growth as an inflation indicator, money velocity will cause precious metals to shine once again.

[To summarize:

  1. greater job growth will result in
  2. lower unemployment which will lead to
  3. increased bank lending (money velocity) which will result in
  4. higher rates of economic activity which will lead to
  5. higher inflation which, in turn, will result in
  6. higher gold prices.]
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://www.financialsense.com/contributors/chris-puplava/next-phase-precious-metals-bull-market (© 1997–2013 Financial Sense® All Rights Reserved; For a free subscription to the weekly Best of Financial Sense Newsletter, CLICK HERE to subscribe.)

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One comment

  1. Chris P.
    RE: To summarize:
    greater job growth will result in
    lower unemployment which will lead to
    increased bank lending (money velocity) which will result in
    higher rates of economic activity which will lead to
    higher inflation which, in turn, will result in
    higher gold prices.

    I think that your result is factual but for these reasons:

    1. Job growth is only for poorly paying jobs, we have not seen “real” job growth in good paying jobs and we will not until Americans can get lower interest rates on their existing mortgages and/or we start fixing our infrastructure!

    2. Lower unemployment is simply a result of the Government changing the way they calculate the numbers, Americans are hurting for jobs, not Government BS.

    3. The Big Banks are dragging their feet because they don’t want to lose access to the almost zero interest money they are getting from the Fed. If they really started lending, then the economy would get better and the Fed would raise Bank rate, which is something that the Banks never want to happen.

    4. Higher rates of economic activity, where in the Banking industry? For most Americans, this is just a dream.

    5. Inflation is far higher than the Government numbers indicate, A good example is the 1.7% COLA for Social Security which as we all know is really low as compared to reality of at least 4 to 5%.

    6. All PM’s are being depressed with the help of fear mongering, as the Central Banks call in favors from the MSM, while at the same time, the really BIG PM’s players are hoping to scoop up as much as they can, without causing the value of PM’s to rise, while at the same time getting all those that are doing paper PM trades to get out of the market. This is why the availability of PM has not increased even though many have sold their positions in PM, all the paper trades are just that paper, while all those that sold actual PM had their PM held by the buyers because they feel that PM’s will soon rebound.