Inflation to Unleash a Financial Tsunami
Economics / Inflation
Jun 25, 2008 - 09:44 AM

By: Mark_OByrne

Gold closed at $888.80 in New York yesterday and was up $4.40 and silver closed at $16.61, down 16 cents. Gold fell initially in Asia, then rose in early European trading prior to falling again in recent trade.

With oil prices remaining near record highs, near $137 a barrel this morning and the dollar slightly weaker (it breached and remains close to 1.56 against the euro again this morning), gold should remain well bid at these levels but in the short term anything can happen and support is at $880 and $860. With the Federal Reserve likely to leave interest rates on hold at 2%, markets will look to the accompanying statement for indications as to future interest rate direction.

Oil and gasoline prices are at record highs, food prices rising significantly and inflation surging internationally, the Federal Reserve may in the coming weeks be forced to increase interest rates despite consumer confidence reaching all time record lows, house prices suffering their record annual drop and global economic slowing sharply.

With inflation far higher than interest rates and continuing negative real interest rates ( interest rates at 2% while inflation is at 4%+ ) continuing cheap money could lead to an even worse inflationary spiral and will likely lead to sharply increased investment demand for gold to hedge against this inflation.

Inflation to Unleash a Financial Tsunami
The inflation genie is now well and truly out of the bottle and now poses significant risks to the global economy.

Just yesterday there was a huge 96.5% increase in iron ore prices (despite iron ore prices having already surged in recent years). Inflation is out of control and even by wildly understated official measures, prices are climbing at two - or more - times government targets. And with central banks printing money and flooding the financial markets with cash, inflation is going to get a whole lot worse before it gets better.

The FT reports today that the “spectre of inflation returned to haunt the global economyâ€