Thursday, August 18, 2011

Inflation, Gold and You

Inflation 101.

Inflation is not a rise in prices. It is an increase in money supply that causes a rise in prices. Deflation is the opposite. Stagflation is a rise in the money supply (and higher prices) with low economic growth.

With inflation, the more money chasing the same amount of goods and services equals higher prices. Things are finite (like gold in the picture below; also energy and food etc) while paper promises are infinite. Something happens when you match paper money up with things. You get a price.

The value of the dollar began its decline after Richard Nixon divorced it from the last remnant of the gold standard in 1971. At this time, America was printing money to finance wars and other deficit spending. As a result, gold was being called in by France, and other countries, who could see the dollar devaluing. One ounce of gold, that was backed by $35 in paper promises at the time of the post-war Bretton Woods conference, was now taking more dollars to redeem. France wanted gold for dollars as golds purchasing power and wealth preservation qualities remained the same.

Currently, it now takes 1800 of these dollars to buy the same amount of gold as in 1971. Or 1 dollar buys 1/1800th of an ounce of gold.

What changed? Where did the extra dollars come from?

Gold didn’t change. Sure, there has been more gold mined since 1971, so the physical amount should take more dollars to buy, if the supply of dollars was the same.

But where did the extra 1765 dollars come from to take the price from $35 to $1800? You guessed it, created out of thin air. Brought into being by strokes of the pen and latterly by computer keystrokes.

This process is continuing and the same principles apply today with your hard earned dollars. This is why you go to the supermarket this week and find that it takes more dollars to buy the same stuff as it did last week or last year. Or in 1971 by far.

Because gold has been accepted as money for over 5000 years (see at the bottom of this blog as to why)  people are purchasing it in greater quantities now. It is finite and has always been the true reserve currency to preserve wealth and purchasing power. The dollar is declining in value and will continue unabated with this current debt crisis.

Many commentators still denigrate gold (and silver), but history and math tell us that to rest easy in these volatile times, the best way is to own gold.

Gold in New Zealand dollars: $2138.92 per oz
Previous all time high: $2243.75 per oz

Silver in New Zealand dollars: $48.21 per oz
Previous all time high: $59.19
per oz

The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodiann
Your reference: an-001

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