Dear Ladies and Gentlemen
Next week we are going to publish the 2018 edition of our yearly Incrementum “In Gold we Trust” research report. Today’s weekly can be seen as a teaser. Please enjoy!
Year after year the volume of our research report is expanding and my friends and partners Ronni Stöferle and Mark Valek have been working hard again to explain their take on inflation, caused by excessive global monetary and debt expansion. The two of them obviously can’t do this on their own but with the help of Demelza Hays and David Holzinger and some external contributors the team has come up with some 220 pages of interesting arguments, charts and quotes.
Let me start with one of those quotes:
“Someday we will look back on this period and shake our heads at how gold was literally being given away while at the same time folks were falling all over themselves to lend governments money at a discount to the actual rate of inflation, and the central banks were telling us they were determined to precipitate even more inflation. If this scenario were written in a novel, no one would believe it, but that is where we are.”
(Bill Fleckenstein)
As we all know, a crucial driver of the gold price is inflation. Therefore, in this year’s report we want to discuss the topic in more detail. As always, we feel obliged to define terminology before getting to the heart of the matter. The regular in gold we trust readers know already that we try to untangle any linguistic confusion between the following terms in connection with inflation: inflation originally means “monetary inflation”, i.e. the expansion of the money supply, while price inflation (i.e., sustainably rising prices) is its consequence. To understand the phenomenon of rising prices better, we need to back up a bit. A crucial element of a society that is based on the division of labour with indirect barter is that the value of goods and services is measured in units of the medium of exchange. Whenever the most important features of a market-based society were in place throughout history, productivity rose on the back of efficiency gains. That is, by means of the division of labour, innovation, and capital accumulation, less input created more output.
In a monetary system with a (relatively) constant money supply, these efficiency gains are reflected in generally falling prices. We can call this phenomenon price deflation. Only an inflationary fiat money system comes with the characteristic of generally rising prices. This can be clearly shown based on long-term commodity prices measured in gold and in USD. The transfer from deflationary to inflationary monetary systems manifests itself in the price development of commodities.
From monetary inflation to price inflation: a long and complex process.
At the outset, we must further define the term inflation. It is important to understand whether price inflation is supposed to mean consumer price inflation or asset price inflation. In general use – but also the way the central bankers refer to it – inflation tends to mean consumer price inflation, which is usually captured by a consumer price index (CPI). However, monetary inflation does not only affect consumer prices but also asset prices. Since asset prices are, if at all, only rudimentarily and indirectly captured by the CPI, they tend to be underrepresented in public debate. What does not help is that rising share prices tend to be positive. However, the decisive factor in the manifestation of elevated consumer price inflation is psychological. The velocity of circulation of the currency depends on the behaviour of individuals. If people have the inclination to increase the amount of money they hold, this behaviour can temporarily deprive the economic cycle of more money than the central bank or the commercial banks can recirculate through the two-step process of money creation. Money-supply growth and velocity of circulation are negatively correlated.
Rising inflation rates generally mean a positive environment for the gold price. From the end of 2011 to the beginning of 2015, inflationary tendencies were clearly receding; since then, they have picked up. In the short run, the base effect of inflation should create further upward pressure until summer. For inflation rates to continue increasing, we think commodity prices would have to rise, especially the oil price and this is exactly what we see happening, now.
Please share your thoughts and ideas with me. Please feel encouraged to do so and please send your messages to:
smk@incrementum.li
Many thanks, indeed!
Now, today I also must inform you about the new European General Data Protection Regulation (GDPR). This regulation offers an increased level of privacy protection and becomes effective today, on May 25, 2018. In Liechtenstein data regulation was already rather strict, especially in the financial industry. To comply with the new GDPR standard, we’ve updated our privacy policy. The extensive information can be found on our webpage.
And now, Ladies and Gentlemen I wish you a great day and weekend!
Yours truly,
Stefan M. Kremeth
