The Five Whys of Silver Investing—Part Two

In part one the first two “whys?” were listed and explained.  In part two, the final three will be covered, as well as the solution to root cause.

3.  Why will the price of gold explode upward?

Because of widespread fear of runaway inflation.

Inflation has already started. Inflation in India is running about 9%.  The official inflation rate in China is about 6 %, but the actual rate is much higher. The Chinese government, like the American government, keeps adjusting the official measurement.

In America, the number most often quoted is the core Consumer Price Index (CPI), which does not include food and energy. Core CPI is running 2.4%. What consumer doesn’t eat or buy energy? The CPI has been modified so many times the past 40 years that it doesn’t resemble its original form at all.  Measured as it was in 1970, year over year inflation in the U.S. is running seven to eight percent in the fall of 2011.  Those who do food shopping on a budget know.   The ingredients for Thanksgiving dinner for four in 2011 cost 13% more than they did in 2010.   That little fact is based on average prices in 135 American cities.

4.  Why will there be widespread fear of runaway inflation?

Because rising, out-of-control inflation will soon be a reality and obvious to all.

Inflation cannot be hidden and “adjusted” away much longer.  The more observant and analytical amongst us already see inflation and are quietly converting assets to gold and silver. In the 1970s, the annual inflation rate in the United States ran 15% to 18%.   The price of gold shot up from $35 an ounce to about $850 an ounce in a few years.   During that same time period, the price of silver shot up from a couple of dollars an ounce to almost $50 an ounce.  After allowing for inflation since 1980, neither the price of gold nor the price of silver has yet reached those highs.

The middle class in America is already beginning to pull their retirement savings out of the stock market.  Much is going into the bond market, which already has a real rate of return of less than zero.  Ten year U.S. government bond pay about 2% a year.  But the real rate of inflation is 7% – 8%.  Those who buy 10-year bonds are losing at least 5% a year.  Of course, those who are holding cash are losing at least 7% a year in buying power.

5.  Why will there be rising, out-of-control inflation?

Because The Federal Reserve, and other central banks around the world, have printed unprecedented amounts of currency.

In fact, this is the definition of monetary inflation – the creation of money without the corresponding creation of assets.  As economies grow and more assets are created, more currency is required to keep the wheels of commerce turning. However, when more currency is created than assets, the result is monetary inflation.  The Federal Reserve Bank of the United States has created some two trillion dollars in the past three years, even though the U.S. economy actually shrunk.

Monetary inflation has already happened in the U.S., Japan, China, and Europe.  All countries have created much more currency than is required.  It takes two to three years, depending on the level of commercial activity, for monetary inflation to be felt. Monetary inflation took place three years ago as the result of the TARP program at the end of the Bush administration is being felt now (7% – 8% real rate of inflation in the U.S.).  Since President Obama took office, the rate of increase in the money supply has tripled.  That inflation has not yet been felt.  The real rate of inflation will hit double digits.  And even when the government adjusts the CPI measurement again, more people will begin to realize we’ve been duped.

The Root Cause is printing of money to the tune of a 300% increase in the U.S. money supply in a 2-1/2 year period.

The solution, pull the money out of circulation.  But the U.S. government is experiencing annual deficits of $1.3 trillion.  To be able to reduce the money supply, the federal government must cut its budget by more than $1.3 trillion per year.  AND—the surplus must be taken out of circulation.

Any congress that cuts spending by over $1.3 trillion a year will be voted out, and they know it.  Root cause will not be remedied.  5) The money supply of the U. S. will not be decreased by $2 trillion.  4) The monetary inflation that has already occurred will continue to manifest itself in the economy.  3) Real, rising inflation will cause fear of runaway inflation.  2) Fear of runaway inflation will result skyrocketing gold prices.  1) Investors will turn to silver, poor man’s gold, and the ratio of the price of gold to the price of silver will return to historic levels.

How long for this silver investing scenario to play out? My best guess is four to ten years.

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