Friday, September 17, 2010

Canary in the Inflation Mine

Gold hit a fresh record high of $1,277 today. Lately it’s been on another tear. People have a thousand reasons for the gold rally: Safe havens. Uncertainty. European debt. American debt. Better than stocks. And on and on.

My take?

Gold keeps rising because of bad money. The Fed’s target rate is negative and will remain so. The dollar and other paper currencies are in a race to the bottom. The Fed is contemplating printing even more money. And when you add all this up, the inflation outlook is higher, not lower.

Gold is the canary in the inflation mine.

Now, today’s CPI is low: only 1.1 percent over the last 12 months. But producer prices are 3.1 percent. And import prices are 4.1 percent. Meanwhile, commodity indexes are rallying everywhere. Silver has gotten back to $20.

In the short run, I know that inflation is not a big problem. I also know, whatever the unemployment rate, that deflation is not a problem. And I continue to believe that proper economic reform should re-link the dollar to gold. If the Fed and Treasury do not do this, inflation is going to become a problem.