Surging demand from Asia is only half the story when it comes to inflation and soaring natural resource prices.
Two of the biggest inflation mongers are now getting ready to strike …
The first is right here in the U.S. — Ben Bernanke and his money printing presses.
The second is all around the world — WAR!
Combined, easy money and war will boost gold and oil to even higher levels. I’ll tell you what to expect in just a moment. But first …
Why Ben Bernanke Is
Going to Fire Up Inflation
With the next Fed meeting coming next Tuesday, just five days away, you need to understand who Ben Bernanke really is.
Bernanke is a diehard believer in the theory that, after the Crash of 1929, the Fed messed up big time.
He’s utterly convinced that the Fed failed in its primary mission to prevent deflation … that this was its greatest economic policy blunder in U.S. history … and that the Great Depression could have been prevented.
Think about that for a moment. If you’re so opposed to deflation, what side of the fence are you going to fall on when it comes to making critical decisions about our nation’s economy?
Answer: You’re going to consistently err on the side of “inflation.” You’d rather print more money than let the economy slow down … and let money chase scarce resources than risk a decline in demand. Even when you raise interest rates, you’ll bend over backwards not to upset the applecart.
Don’t think for a minute that Bernanke does this unknowingly. Consider two of his previous statements as a Fed Governor …
“The U.S. government has a technology, called a printing press — or today, its electronic equivalent — that allows it to produce as many U.S. dollars as it wishes at essentially no cost.
“Under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
If that’s not evidence of an “easy money” central banker, I don’t know what is.
And this is one of the key reasons why — despite signs of an economic slowdown and the crunch in the housing market — oil is back over $75 per barrel, gold is trading at $647 an ounce, and copper is reaching back toward its record highs.
It’s why core inflation data just hit an 11-year high. It’s why wages are starting to rise … why inflation is picking up steam even in China … and why the global economic system has a built-in tendency to inflate.
Savvy investors and professional traders know this. So they’re holding on to their inflation hedges and buying more on the dips. They’re preparing for an even greater wave of inflation ahead.
This is also why I’ve stayed the course in my Real Wealth Report, protecting my subscribers from the loss of purchasing power their dollars are experiencing.
But monetary inflation is only one part of the equation driving inflation higher.
Why War Is Potentially the Biggest
Inflation Monger in History
You’re now witnessing the next stage of this Cycle of War, the point in time when regional wars turn into devastating international battles.
Warning: The current Middle East War is the root of a widening conflict that could soon rope in Syria and Iran. The U.S. will have no choice but to get involved, increasing the likelihood that it will target Iran’s nuclear facilities.
I’ve given you my reasons many times. Now, the evidence is everywhere. And unfortunately, this situation is not going to go away. Instead, it’s threatening to usher in a huge inflationary wave that’s likely to be far more enduring than anything we’ve seen in the past.
War has immense consequences on the economy, our government, and, in turn, its fiscal and monetary policies. And consistently, war has led to periods of high inflation for two reasons:
Military spending stimulates demand for goods and services throughout the economy, driving prices higher.
It causes central bankers to pump even more money than normal, resulting in rapid expansion of money and credit.
We’ve already established that Bernanke is a fan of easy money. In times of war, like we have now, what do you expect him to do? Tighten?
Never mind all the debts our country already has! The federal budget deficit, the trade deficit, the unfunded liabilities. How does the most indebted country in the history of civilization pay for war and handle all its existing liabilities?
There’s only one answer: Inflate the economy by devaluing the U.S. dollar and printing as much money and credit as possible (even while raising interest rates).
Result: An even greater-than-normal inflationary cycle.
The Civil War, World War I, World War II, and the Vietnam War were all financed by easy money, and they were all accompanied by inflation.
Based on the conservative Consumer Price Index:
- Inflation during the Civil War (1861- 1865) jumped 117%.
- During World War I, from 1917 to 1918, inflation shot up 126%.
- During World War II, prices increased 108% from 1941 — 1945.
- The Vietnam War caused prices to rise 41% between 1965 and 1973.
Now, since September 2001, as measured by the change in the Consumer Price Index, overall price levels have only risen 13.8%.
That’s still just one-third the price inflation we saw during the Vietnam War … one-eight the inflation during World War II … and one-ninth the inflation of World War I or the Civil War.
My take: The inflation cycle has barely begun.
Gold and Oil Preparing
For Their Next Leg Up
Let’s look at what the market itself is telling us right now: Gold and oil are confirming my suspicions regarding the forces I just described to you.
First, gold …
In the chart, notice how gold is holding well above three important trends:
#1. Dating back to mid-2004, is the trend channel from the earlier stages of gold’s bull market. The price of gold is well above that channel.
#2. The more recent, sharper uptrend from mid-2005 represents solid support. Plus, it paves the way for much higher gold prices to come.
#3. Gold has held firmly above its 50-week moving average.
My view: I expect new highs in gold above $740 an ounce by yearend.
Now, to oil …
If you’re among those who think oil is going to fall back to $50 a barrel or lower, this chart should help dissuade you of that notion.
Oil has recently been bouncing around between $70 and $74, building massive support for its next move higher. The uptrend is solid, steady and sustainable. And just this week, oil has already climbed above $75.
Moreover, I’ve added two indicators to the chart. Both suggest the next move up could come any time.
#1. The 50-week moving average is rapidly rising toward the current price of oil. This indicates that another move in oil is about to begin.
#2. Massive support is building at the $66 to $68 level. This means any price dips below $70 will likely be met with strong buying.
My view on oil prices is the same as before: I expect $100 a barrel before yearend.
Consider taking the following actions …
First, keep a solid portion of your money in cash, using a money market fund — ideally one dedicated to short-term Treasuries or the equivalent.
Second, invest in a diversified gold mutual fund such as the DWS Fund (SGLDX) or the Tocqueville Gold Fund (TGLDX). And stick with my favorite gold stocks. (The complete list and model portfolio are in the latest issue of my Real Wealth Report.)
Third, hold select natural resource conglomerates in energy, food, and other areas, including alternative energy companies. (Also detailed in my Real Wealth Report.)
Fourth, Move out of stock market sectors that are rapidly falling out of favor. That means virtually all sectors that are adversely affected by rising inflation and/or interest rates. Most vulnerable: Mortgage companies, builders, real-estate-dependent banks, brokers, and REITS.
Best wishes,
Larry
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Colleen Collins, Amber Dakar, Ekaterina Evseeva, Monica Lewman-Garcia, Wendy Montes de Oca, Jennifer Moran, Red Morgan, and Julie Trudeau.
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