Are we entering a deflationary or inflationary environment? Falling house and equity prices have many mainstream commentators convinced that deflation is the issue. However, by watching certain key indicators we can be much more confident that inflation is the looming risk for investors, not deflation.
Excess Banks Reserves: Excess bank reserves continue to explode in the US and around the globe – US excess bank reserves stand at US$ 767 billion and counting. Assuming 10 to 1 lending ratios, the US banking system now has the ability to create almost US$ 8 trillion in additional money supply on top of only US$ 13 trillion in existence – almost a doubling of the money supply once they begin to lend again.
Government Debt Levels: The US bailout is running at US$ 8.5 trillion and counting. The per capita numbers are equally alarming in Canada, UK, EU, China and India. The US monetary base is around US$ 13 trillion so this could add 60% to the US money supply. Research shows that even with the current dramatic deterioration in US government finances we can expect worse to come. Over the course of the typical banking crisis government debt levels rise an average of 86% in the three years following. If investment demand is not present for the huge debt issuances that this will entail, will the worlds central banks revert to monetizing their governments’ debts – or in simple terms printing the money.
Monetary Base Growth: The Monetary Base, narrow money supply or M0 is currency (notes and coins) in circulation and in bank vaults, plus reserves which commercial banks hold in their accounts with the central bank (minimum reserves and excess reserves). M0 is usually called the monetary base - the base from which other forms of money are created - and is traditionally the most liquid measure of the money supply. US M0 has exploded! In 2008 it was up 98.9%! The US Federal Reserve has doubled the monetary base in a single year! Between January 1960 and August 2008, the 48-year average M0 growth rate was 6.0% with very little volatility around that number. Growth rates exceeding 10% were rare and often preceded sharp gains in commodities prices including precious metals.
Broad Money Supply Growth: Based on Shadow Stats data, the rate of US M3 growth has stopped a decline that began in April 2008 and appears to have bottomed at 8.9% in November 2008. Growths rates of 9-10% for the world’s reserve currency are bad enough, but they now appear to be heading back to the stratospheric levels of early 2008 when they exceeded 16% annually (money supply doubling in less than 5 years!)
Why Invest in Precious Metals: The explosion in the global money supply and unfunded government obligation for bail-outs – in the US, Canada, UK, EU and elsewhere indicate that we are heading into a period of high inflation, perhaps even stagflation. Precious metals have a high positive correlation to inflation. Stocks and bonds have a negative correlation to inflation. Mathematically, this means that precious metals are an excellent inflation hedge and will tend to outperform bonds and stocks during inflationary times.
Groundswell is currently performing due diligence on a number of funds that are seeking to raise capital to make direct investments in unlisted companies producing precious metals – the strategy is to build portfolios of high quality producers that will allow investors to obtain income while having upside exposure to further increases in precious metals as inflation accelerates. By prudently deploying capital in well managed funds investors can obtain superior income producing assets with significant capital gains potential over the medium term.
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