Gold Remains Underpinned by Rising Global Price Risks

by Peter A. Grant

February 25, a.m.
(from USAGOLD.com) --

Ben Bernanke has always made it quite clear that in his opinion, deflation is a far greater evil than inflation. Therefore, it should come as no surprise that the Fed under his leadership has attempted to orchestrate inflation by implementing extremely loose monetary policy and pumping the American economy full of liquidity. The latest FOMC statement from 26-Jan said: Although commodity prices have risen, longer-term inflation expectations have remained stable, and measures of underlying inflation have been trending downward. That statement seems to be reflected in the BLS CPI data, but consumers from Omaha to Oman are wising up to the reality that inflation is here.

[ chart, BLS CPI data (red line) is compared with the SGS Alternate CPI (blue line). The alternate CPI is calculated by Shadow Stats using the same methodologies the BLS used to generate CPI in 1980.

Yesterday the US Agriculture Dept forecast that food prices could rise as much as 4% this year, well above expectations for CPI. Agriculture Secretary Tom Vilsack said, "We're keeping an eye on this, but I would suggest that as a result of what we went through in 2007 and 2008 we are better prepared to respond as a country and as a globe." [chart]

The Food and Agricultural Organization of the United Nations reported in December 2010, that their food price index had risen above the 30-year peak established during the rampant inflation of 2008. By January of this year, the FAO food price index had increased by an additional 3.4%. It already seems to have been forgotten that the recent political turmoil sweeping North Africa and the Middle East began as a food price protest in Tunisia.

Just today, Russia raised their benchmark refi rate 25bp to 8.0% in an effort to tamp accelerating price risks. Inflation in Russia is running at a 8.8% y/y pace, and rose 2.4% in January alone. Consumer prices in Vietnam were up 12.3% in February from a year earlier. Bond prices fell sharply this week in Vietnam as the government is under increased pressure to tighten policy as a means to reign in inflation.

Rising inflation in the EU is proving problematic for the ECB. Germany announced that HICP inflation accelerated to a higher than expected 2.2% y/y pace in Feb. The Germans are very sensitive to inflation, and being the largest economy in Europe, exert a high amount of influence within the EU. While inflation concerns are rising, prompting heightened pressure to tighten, the ECB is reluctant to do so as the Continent continues to struggle with sovereign debt crises. They fear that if they raise rates to hold down inflation, they raise borrowing costs for heavily indebted periphery countries, heightening the risk that further bailouts would become necessary.

Fed chairman Bernanke is quick to dismiss the notion that his policies are to blame for rising inflationary pressures across the globe. However, there was a pretty damning op-ed in the Wall Street Journal this week entitled The Federal Reserve Is Causing Turmoil Abroad that refutes Bernanke's contention that high demand and tight supplies in emerging countries are to blame for higher prices.

"Consider, for example, that much of world trade, particularly in basic commodities like food grains and oil, is denominated in U.S. dollars. When the Fed floods the world with dollars, the dollar price of commodities goes up, and this affects market prices generally, particularly in poor countries that are heavily import-dependent."

One sure way to accelerate the loss of US global influence and hasten the demise of the dollar as the world's reserve currency is to destabilize other economies -- both economically and politically -- through our domestic policies. We did it by creating exorbitant systemic risks in the global financial system and now we're doing it again as we self-servingly try to bolster our own economy at the expense of the world around us. Not a good way to win friends and influence people, but a pretty good recipe for driving up the price of gold in the long-run.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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