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*.
This post is presented compliments of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and the Intelligence Report newsletter (It’s free – sign up here). The article may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy rea. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
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.
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:
- 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.]
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.)
Right now gold has no friends. Even some of its biggest proponents are declaring the bull market to be over…Let’s kick around a ‘short list’ of potential reasons for what caused the latest bloodbath. Words: 1170
The recent plunge in gold prices below $1500 an ounce has suddenly awoken, well, just about everyone. The “gold bugs” are yelling that it is a conspiracy theory by the Fed while the stock market bulls say it is a sign that the Fed has achieved its goal of creating economic growth. Unfortunately, both arguments, while great for headlines, are wrong…The simple truth is that…
Everyone personally holding physical gold and silver, as we have been recommending, has no margin call to meet and no reason to sell. This is a temporary situation, and it will pass. Now is not the time to panic, as that is the intent of the central planners/bankers in forcing gold and silver through strong support levels. Stay the course. To the extent you can, continue buying the physical metal.
What happened?! is the question so many are asking about Friday’s waterfall in prices. A better question is, “Why?” Outside of the insiders, no one really knows. Yes, there can be some fairly cogent explanations, lots of glib answers, but no one knows, for sure. What we do know for sure is that the market is always the final arbiter [and this is what the market is saying:]
The paper gold market is being used to shake the bullish tree harder this time than any time before because of what is to come. Fear is the most powerful emotion in markets and it is being used perfectly to enrich the grand names of finance at your expense. We are right in front of that time when the market performs a classic bottom both in shares and physical. From this point gold is going to and through $3500 [so] if you are unable to buy at this time there is one thing you can do – to get into the fight and out of the stands. That act is do nothing, and do not capitulate. Let them play the price game, but give them nothing whatsoever of yours. Words: 758
By its obvious and concerted attack on gold and silver, the U.S. government could not give any clearer warning that trouble is approaching. The values of the dollar and of financial assets denominated in dollars are in doubt. For Americans, financial and economic Armageddon might be close at hand….
David Mcalvany (www.mcalvany.com) covers the reasons behind the major pullback in metals on April 12, and where they may go from here, in this most enlightening and re-assuring 8:14 minute video.
I have no problem with corrections in general, as they are a healthy part of any bull market and provide a platform from the which the next upleg can spring but something is not quite right about the recent price action in precious metals as the markets have become increasingly divorced from reality over the past few months. Let’s look at some of the glaring contradictions and then discuss the implications.
In my article of April 5th, posted here, I maintained that in the next year, and particularly for the next three to six months, a liquidation phase in the current cyclical bear market in gold would likely develop,,,[causing gold to] fall sharply. [Below are the 8 reasons I mentioned back then which still remain relevant today.]