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| Gold or the Government, which do you believe?
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Earlier this week, Wall Street Pollyannas reacted
with glee to the release of seemingly mild producer and consumer
prices data. While August PPI and CPI rose .6% and .5%, annualizing
to 7.5% and 6% respectively, the completely meaningless, highly
manipulated, “core” numbers, which have conveniently
become the only figures making headlines, were far less alarming.
According to the government, August “core” PPI
was unchanged, while “core” CPI rose a scant .1%.
However, not to be fooled, the price of gold,
considered by many to be the ultimate inflation indicator,
rose to a new seventeen year high, gaining about ten dollars
this week, and over twenty dollars in the last three. The
Philadelphia Gold and Silver Index (XAU) gained about 7% on
the week, bringing its three-week gain to 17%. Gold’s
recent surge confirms the break-out that I first wrote about
on June 6th “Gold & Oil Could Force Surprise ECB
Rate Hike” and again on June 17th “Gold’s
Trifecta Reveals Dollar’s Diminished Status” available
on my web site at http://www.europac.net/archives.asp?year=2005&qtr=2
As the price of Gold tends to rise in inflationary
periods, economists should ask themselves if they believe
the government or gold. History and recent anecdotal evidence
certainly favor gold. On Thursday, the Philadelphia Fed’s
manufacturers report for September revealed that despite a
sharp slowdown, its prices paid index surged 257 points to
its highest reading since January. In addition, this week
the national average price of unleaded gasoline breached the
three dollar per gallon level for the first time ever, exceeding
the inflation adjusted peak of $2.94 set back in 1981. Actually,
today’s average would be even higher if it reflected
the same percentage of gas sold at full service prices as
was the case 1981.
Also the week saw fresh releases of trade and
current account deficit data. As an example of the power of
diminished expectations, July’s horrific $57.9 Billion
trade deficit was greeted as good news, as it was less than
the slightly more horrifying $60 billion that had been feared.
The second quarter current account deficit, which came in
at a higher than expected $195.7 billion, would have been
a new all-time record, had it not been for the upward revision
of the first quarter current account deficit to $198.7 billion.
The $3 billion narrowing in the quarterly current account
deficit (the first time since 2003) can hardly be seen as
progress, as it resulted entirely from a $4.4 billion reduction
in foreign aid. Widening trade and current account deficits
will exert additional downward pressure on the dollar and
upward pressure on consumer prices. Finally, President Bush’s
“Marshall Plan” for the Gulf Coast will only fuel
inflation’s fire, as the money needed to fund it will
either be created by the Fed, or borrowed from abroad.
Perhaps the most important reason to be skeptical
of government inflation numbers is that the government, like
a fox campaigning to guard a hen house, has many reasons to
be disingenuous. As the world’s largest debtor, the
Federal Government is inflation’s primary beneficiary.
More importantly, for America’s bubble economy to continue
expanding, politicians must keep consumers borrowing and spending.
By transferring wealth from creditors to debtors, inflation
helps makes this possible. For debtors, inflation reduces
the real burden of debt service, while simultaneously increasing
the prices of their assets, particularly their houses. Unfortunately
for creditors, the vast majority of American voters are debtors,
and monetary policy is therefore conducted specifically to
benefit the latter.
Considering the fact that so many creditors are foreigners,
and therefore ineligible to vote, this amounts to a political
no-brainer.
However, this policy can only “succeed”
as long as the Government can con America’s creditors
into believing that inflation is not a threat, even as it
creates it with increased veracity. Recent evidence suggests
that this propaganda campaign is beginning to wear thin. This
week’s pronounced weakness in the bond market, despite
soft economic data and “benign core” inflation
numbers, reveals that more investors are getting wise to the
con, and looking to gold rather than the government as a reliable
indicator of inflation.
The best defense against inflation is not to
own the currency being inflated, in this case the U.S. dollar.
Download my free research report “The Collapsing Dollar:
The Powerful Case for Investing in Foreign Equities”
at www.researchreport1.com
and protect yourself.
Peter D. Schiff, President
Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06820
phone 203-662-9700
toll free 888-377-3722
email schiff@europac.net
web www.europac.net
*****
If you have not yet done so, download my free
research report at www.researchreport1.com,
and get out of the dollar before the race turns into a stampede.
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