The Inflation Mystery!
Puru Saxena
15 August, 2005
Have you ever wondered why
your savings keep losing value over time? Why is it that the
cash you saved ten years ago, buys significantly less today?
It is a fact that most people
accept inflation as a part of life. To the masses, inflation
is as natural as the rising sun!
We live in an era where inflation
is widely accepted yet only a few seem to understand it.
As the public remains asleep,
central bankers around the world continue to destroy the purchasing
power of money by steadily increasing its quantity. Inflation
is not a mystical residue of an economic or business cycle. It
is simply manufactured by central bankers at their own "sweet"
will. You do not believe me? Then, consider the following fact-
During the entire 19th century,
there was zero inflation! Zip! Nada! In fact, we witnessed mild
deflation (contraction of money supply) during that entire century.
To put it simply, cash saved in 1800 bought roughly the same
amount of goods one hundred years later! In today's world, this
is unimaginable, almost absurd! But wasn't money supposed to
be a store of value? Obviously not, if Mr. Helicopter Bernanke
drops dollar bills from the sky!
Things changed radically when
the Federal Reserve came into power in 1913. Its official agenda
was to "manage" inflation in the US. But since the
Fed came into power, the US dollar has actually lost 95% of its
value! Thanks to the Fed's huge success in "managing"
inflation, the dollar your ancestors saved for you in 1913 is
now only worth 5 cents!
This destruction of wealth
occurred due to Fed-sponsored monetary inflation, especially
after gold was removed from the monetary system in 1971. Take
a look at Figure 1, which shows that the money supply grew from
$300 billion in 1960 to roughly $10 trillion today! That is an
astounding growth rate of 3,300% or a 33-fold increase! This
huge rise in the supply of money has caused money to lose its
value (purchasing power).
So, with such an unbelievable
growth rate, you can clearly see that the supply of money has
in fact been the best performing item over the past 45 years!
Forget stocks, bonds, housing and commodities. Let's just "invest"
in the money supply! Unfortunately, the "money supply"
contract does not trade on any exchange! Otherwise, everyone
would become mega wealthy, simply by "buying & holding"
for the long-term!
[Editor's note: Ace idea, Puru. If we can trade contracts of
stuff like the Weather & Cheese, heck, we absolutely
ought to be able to trade contracts of the Money Supply].
With such a consistent track-record,
it would be safe to say that going forward we can expect
this trend to continue. Therefore, as more money is introduced
into the system by the Fed, the value of paper money will continue
to evaporate in real-terms.
Make no mistake; inflation
(increase in money supply) is robbery pure and simple. Inflation
is the confiscation of your hard earned savings!
Figure 1: Destruction
of the value of your money!
(click image to see
large chart)
Source: www.thechartstore.com
In the 1970's, expanding liquidity
caused paper money to lose its purchasing power through commodity
and consumer price surges as natural resources went through the
roof! Meanwhile, in the 1980's and 1990's, paper money lost its
purchasing power through booms in asset-prices. Over the past
25 years, bonds, stocks and real-estate rose exponentially. In
each case, whether through consumer price or asset price surges,
the purchasing power of money ultimately got destroyed.
In the years to come, I anticipate
that commodity prices will (once again) soar and consumer prices
will rise significantly. On the other hand, I expect financial
asset-prices to decline as stocks and bonds tend to perform poorly
when commodities rise.
At the moment, it is really
quite hard to find genuine value as all the financial assets
(stocks, bonds and housing) are grossly overpriced from a historical
viewpoint.
Every investor ought to take
positions in gold and silver as paper money will probably lose
value against tangibles over the period ahead. Gold has spent
the last few months consolidating within its ongoing bull-market,
which has a long way to go both in terms of price and time. A
few months ago, I had stated that the US dollar was likely to
rally against major foreign currencies. As expected, the US dollar
did rally but gold came through as the real winner. Despite a
strengthening US dollar, gold refused to decline and the yellow
metal is now trading at a multi-year high when measured in Euros
and the Yen.
In my opinion, gold is one
of the cheapest assets paper "money" can buy these
days. No, let me correct this - in fact, around $435/ounce, gold
is literally being "given" away!
A lot more follows for subscribers...
15 Aug, 2005
Puru Saxena
Saxena Archives email: puru@purusaxena.com website: www.purusaxena.com Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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