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One thing we find truly
amazing about the markets is that they’re much more than just
investments. Markets provide a way of peeking into the future, if you
understand what they’re trying to tell you.
These lessons are ongoing
but it’s fascinating and like a giant puzzle.
MARKETS TELL THE STORY
Sometimes the messages are pretty
subtle. But other times they’re major, signaling massive economic,
political or geopolitical shifts.
Most interesting is that
the markets lead. So it’s important to recognize that whatever a market
is telling you, it’s not going to be obvious when that market gives the
signal. The message will become obvious later.
Let’s take gold as an
example. It started moving up in a major bull market in 2001, and it’s
been rising strongly and consistently ever since. Gold always leads
inflation, so it was telling us that inflation was eventually going to head
higher. That didn’t happen for quite a while, but now it’s
another story. Plus, gold’s been telling us much more…
INFLATION ON THE AGENDA
We’ve been writing
about inflation for a long time and why we thought it was coming back in a
big way. As the years passed, the evidence became more overwhelming.
But most people
haven’t been paying much attention. Aside from concerns about high oil
and food prices, there are plenty of other things that are more worrisome.
In the U.S., for instance, consumer confidence fell
to a nearly 30 year low and a recent poll showed that 81% feel that the U.S.
is on the wrong track. This is primarily due to the war, the slowing economy
and the housing situation.
And while these conditions
remain serious, along with a slew of other concerns, like the heavy debt
load, soaring foreclosures and so on, it’s important to recognize that
this is the current situation. It’s not what’s coming.
What’s coming is
higher inflation and it could prove to be more serious than most people
think, at least based on what we’re now seeing.
NOW IT’S HERE...
Suddenly, there’s a
lot of talk about inflation in official circles and that wasn’t the
case before. But over the past couple of months, comments or inflation
warnings were made by the Fed, the European Central Bank and the Bank of
England. Government officials are speaking out, and so is the press. The
International Monetary Fund was the most direct, warning that global
inflation has re-emerged as a major threat to the world economy.
As we’ve often
pointed out, inflation has been creeping back and it’s gaining
momentum. In the past six months, for example, we’ve seen some huge
double digit annualized jumps in U.S. wholesale prices, along with
soaring money supply.
But what’s happening
in other countries is even more interesting and it’s intensifying the
global inflation concerns, which gold saw coming way back when.
Globalization boom...
As you know, many
developing nations have been booming, thanks to globalization. This is taking
place all over the world and this growth is much greater than in the
developing countries.
It’s estimated that
half of the world is leaving poverty behind as standards of living improve. That’s
especially true of the BRIC countries, which are the emerging market leaders
(Brazil, Russia, India
and China).
It’s also true of many Asian countries, as well as many of the Eastern
European, Middle Eastern and Latin American countries.
As living standards
improve, people in emerging nations are able to buy things they
couldn’t afford before, like food and cars. This has greatly increased
demand, and it’s put massive upward pressure on agricultural
commodities and oil. It’s actually been the driving force behind the
commodity boom.
Heating inflation
Over the years, we’ve
taken quite a few trips to developing countries and we’ve seen grueling
poverty up close. It’s a terrible situation and the fact that millions
of people are escaping this lifestyle is a good thing, but like most things,
there’s a price to pay. In this
case, it’s inflation (see Chart 1).
As you can see, inflation
is picking up in most countries (remember, many countries are not shown on
this chart). Aside from Argentina,
for example, inflation is above 15% in many more emerging countries like Vietnam, Latvia,
Estonia, Pakistan and Egypt. It’s more than 10%
in a lot of other countries and it’s a huge concern in Russia, China
and India.
The bottom line is that
inflation is at a 10 year high in emerging countries and The Economist
says that two-thirds of the world’s population will probably suffer
double-digit inflation rates this Summer. This is a huge deal and it explains
why officials are concerned, but there’s more…
SOARING MONEY SUPPLY...
GLOBALLY
Global monetary policy is
now the loosest since the 1970s and money supply is growing almost three
times faster in emerging countries than in the developed world (see Chart
2). As you know, that’s the
direct cause of inflation.
Plus, as The Economist
points out, there are alarming similarities between emerging economies today
and the rich world in the 1970s when the Great Inflation took off.
For example, in many
emerging countries policymakers view the inflation rises as a short-term
phenomenon and they’re taking superficial measures to deal with it.
So the causes are similar
and the results will be the same for everyone, no matter where you live. As
we’re already seeing, commodities, food, oil, building materials and so
on… they’re all going up.
IN SUMMARY
It’s still to be seen
how this will end. But so far, this inflation rise is coinciding almost
perfectly with the 200 year commodity cycle we’ve often shown. If this
continues, and we believe that it will, then there’s a lot more
inflation to come in the years ahead.
What’s currently
happening also strongly favors the outlook for gold and the other
commodities. It’s going to boost demand for gold as a safe haven during
inflationary times and these ongoing developments are telling us to stay with
our gold and precious metals positions.
In fact, gold’s been
telling us this all along. Now we’re starting to see why.
Mary
Anne and Pamela Aden
Editors, The Aden
Forecast
Aden Forecast.com
Mary Anne and Pamela Aden are
internationally known analysts and editors of The Aden Forecast, a market newsletter
providing specific forecasts on gold, gold shares and the other major
markets.
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