Don’t Be Fooled – Inflation is Coming – Seeking Alpha

By: Robert Nabloid of Nabloid.Com

Many people are using this latest weakness in the price of various resources (gold, silver, oil, and other commodities) to claim that the commodity boom is over. They’re wrong. Resource prices have been declining for a variety of reasons, but all of them appear to be temporary. These same people then point to the recent strength in the USD. I contend that the strength is temporary. How often in history does an economy that’s going into recession, with a policy of lowering interest rates, undergo massive increases in the value of its underlying currency? Only time will tell, but I’m willing to bet my money that this isn’t the last of the commodity boom. I’ll put my money where my mouth is and continue to buy undervalued resource companies at extremely attractive levels as I’m expecting inflation in the long-term. Short-term I do see strength in the USD, but not because it’s fundamentally strong. I could never see any long-term strength in any fiat currency due to inflation.

In regards to recent USD strength (and gold weakness), we’ve been witnessing the de-leveraging and unwinding of many hedge funds. Many of these hedge funds were invested in anything but the USD, and as such, when they are required to sell their assets, they are repatriating them into USD’s to give money back to investors and pay off debt. This buying of USD’s in mass is creating extreme strength when the dollar should be showing signs of weakness.

There also seems to be something fishy going on with the gold price on the Comex. Is it manipulation? Yes! On paper you can buy gold in abundance and relatively cheaply. In real life it is actually hard to find a gold/silver dealer that will sell you gold or silver for anywhere near the Comex spot price. The Fed doesn’t want gold to be too strong or they run the risk of losing people’s trust in the fiat currency, and trust is the only way a currency works. So could governments be manipulating the paper prices of gold? Of course, but we all know it isn’t the price or value of gold going up, but the debasement of fiat currencies, that they are attempting to mask by putting a lid on gold.

One of the primary reasons oil is headed lower right now seems to be driven by fear of a deep recession. This fear has merit. An economy financed completely on debt is not a stable or sustainable one. As U.S. consumers are finding out, you must actually pay back debts by cutting discretionary spending, and if you’ve gone too far, declare bankruptcy. With consumers tightening their purse strings, a recession was bound to happen. Now consumers aren’t all rushing to buy half million dollar homes at the same time and the economy is beginning to feel it. Even with a recession, oil is still being used at an alarming rate and drilling is actually down quite a bit! This might catch up with the oil price increasing during a recession! A large number of additional vehicles are being added to the world’s roads each year. Yes, the days of oil energy reliance are limited, but for now it’s still an essential resource.

Regardless of what you believe in politics, I don’t think any independent economist actually believes dramatically raising taxes on corporations will help the recession or the standard of living for those down the line. It probably won’t help the USD either. But for a variety of reasons, tax rates on corporations will undergo extreme changes upwards in the coming years. Combine that with the dramatic rise in minimum wages, and inflation is bound to happen even at a time when the economy may not be running on all cylinders. Outsourcing may continue to make the situation worse. These factors may only further impair the value of the USD.

The government shows no signs of cutting back on spending anytime soon. Massive deficits are forecast for years and years to come, with no signs of slowing or stopping! This is dangerous. An individual, corporation and country can only handle so much debt. If the country does intend to ever pay back these insanely high and still growing debts, there is only one way out; it’s called inflation. Inflation in the future will cause all of these debts to be much easier to pay down, but inflation doesn’t come without a price to the Middle Class.

There isn’t just fear of a recession, but also of deflation, which is affecting the price of commodities. The Fed has said they will do everything they can to avoid deflation, and they will, but at the cost of causing inflation. Flooding the system with capital will cause inflation, eventually.

Regardless of what people think, BRIC countries will slow down and they will feel the recession, but even with BRIC countries slowing, there are millions of additional people being added to the world economy and these people will increase the demand on the world’s resources. This will occur at the same time that fiat currencies are pumping money into the system. The result is an increase in a seemingly infinite resource (the ability to print unlimited amounts of money) to buy things that are finite (like resources).

Traditionally, when the resource sector booms, capital is supposed to flow into the system and many new mines are built. The supply eventually catches up with the demand and the prices fall back and level out. That isn’t happening this time. Resource prices have slipped before many mines were constructed, and now with the big credit crunch, many mines are being put on hold and many exploration companies are cutting back on drilling. This deficit of new mines and resource supplies will be felt, eventually. I’m preparing for a deep recession (not depression) and EXTREME inflation. Inflation will be a bigger issue than the recession. Inflation may well be the big story for the next century. There’s going to be a lot of people running around with an abundance of fake dollars (fiat currency) trying to buy up finite resources