Thursday, September 16, 2010

Gold Hits Another High as Producer Prices Rise

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

U.S. producer prices were up 0.4% in August after rising 0.2% in July. The core rate, which excludes the items where most inflation occurs, was up only slightly. Inflation sensitive gold hit a new high on the news.

The main driver of the increase in the August PPI was energy costs. Gasoline rose 7.5% and even home heating oil was up 7.0% during the month. Both have had some price reversal since then. Food prices supposedly dropped 0.3% because of lower vegetable costs. I personally haven't noticed this, but then again I don't get to shop in the Fantasy Land supermarket like most government statisticians.

The inflation linked precious metals were both higher on the news. Spot gold rose to $1278.30 in morning trade and silver reached $20.78. Gold is likely to have another gain in 2010 and if it does, that would make it ten consecutive years of price rises for the yellow metal. Gold and silver are seasonally strong between August and March. 

The price of gold is strongly linked to the loss of value in paper currencies. While many economists refuse to admit it, this is the definition of inflation. Gold has continually risen during the last decade (in dollar terms) as the U.S. government has consistently reported low and then ultra-low inflation rates. Either gold or the government is mistaken about inflation. Gold has a 5,000 year record of accuracy. How many governments have been around that long?

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

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