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« Give unto Caesar - What to Pay When You’re Selling | Main | SPDR Gold Trust (ETF) Call Options Competition has been won »

Worried about Inflation

Inflation OECD 01 June 2010.jpg

The inflation/deflation debate continues at a merry pace with both sets of supporters banging the drum equally as loud as the other. So we decided to pop over to the UK for this 'take' on the current situation by Stephanie Flanders of the BBC.

Inflation is well above target - and well above where the Bank of England and others expected it to be not very long ago. That much we know. The big question is: should we worry?

Two different events this week seemed to suggest we should. The Organisation for Economic Co-operation and Development said in its latest economic outlook that the UK authorities, almost alone among the OECD, needed to be wary of losing their credibility on inflation. It even gave the Bank of England some free advice - to raise the bank rate to 3.5% by the end of 2011, starting "no later than" the last three months of this year.

The remarks were interesting because (a) the OECD doesn't usually give such specific advice to anyone, let alone to central banks; and (b) the text of OECD reports is always circulated well in advance to the countries concerned. This means someone at the Treasury was happy to see all this appear in print.

The other event was the release of the third estimate for UK economic growth in the first quarter of 2010. As expected, this was revised up slightly, to 0.3%. But the stand-out statistic on GDP wasn't the real figure - it was the nominal. These figures showed nominal GDP - the cash value of all transactions across the economy - growing by 2.1% during the quarter, or an annual rate of more than 8%.

The implication is that the GDP deflator - a measure of economy-wide inflation - rose by more than 1.7% in that period. That is partly due to the rise in VAT in January - but not entirely. Excluding taxes, prices across the economy rose 1.2% on the quarter, up from 1% in the fourth quarter of 2009 and 0.8% in the quarter before that.

The simplest explanation of these figures is also the most favourable to the Bank of England: quantitative easing worked. Just as the Monetary Policy Committee intended, pumping all that liquidity into the economy seems to have helped maintain nominal spending across the economy in the second half of 2009, even while the economy and the supply of bank credit were continuing to shrink.

But the Bank of England can't make the path out of this crisis an easy one. And it can't reimburse us for all that we have lost. Quite the opposite: it has to make sure that all of us - collectively - take a hit.

To read the article in full please click here.

Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

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On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.

Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more. have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

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Reader Comments (1)

For what it's worth, I anticipate the continuation and worsening of this crushing debt-liquidation cycle. Those who levered up and got in over their heads aren't gonna get away scot free. That would involve the banks getting screwed ... paid back in funny money. Given that the banks ARE the government and the Fed here in the F.U.S., that ain't gonna happen until they first extract every pound of flesh possible, stopping only at the point of (almost?) killing the host they're parasitizing.

Best bet: The big squeeze comes first. The punishment phase has simply been deferred by all these idiotic bailout and stimulus programs. The day of reckoning for all the bad debt that's been taken on is still ahead of us. Expect a full blown system crisis, seize-up, and virtual shutdown. That will likely be followed by a very rapid panic monetization phase that blasts new money into the system...with a way to bypass the banks and get "money" directly to people.

So, inflation? Yes, in spades and all at once, but only after they can't borrow money anymore and have to simply "print" it. Felix Zulauf articulates basically this same argument very persuasively in his recent interview with Eric King at

Given that this deleveraging event has now morphed into a sovereign debt crisis, government bonds and the currencies they're denominated in are now suspect. We're witnessing the death throes of a dishonest, corrupt, and unsustainable system. It's about time it goes, but lord only knows what kind of nonsense they'll try to shove at us in its place.

Many seem to fear that gold prices will go way down in a deflationary meltdown. Maybe. My take is that gold prices may go lower temporarily in a full-fledged liquidity crunch a la 2008. That would be nice, but I wouldn't count on it. The end game is pretty obvious now and, speculators aside, gold seems to be flowing into pretty strong insurance-minded hands. Sell your gold? In exchange for what exactly? F.U.S. bonds or currency? Ha. For a short-term death-of-the-financial-system trade only. Stocks? Good luck. Productive land and other assets with real instinsic value like energy? For sure, but maybe not until those things are relatively cheaper and your real metallic money buys more of them.

Of course, I'm just guessing and will try to roll with whatever unfolds. Unlike some who comment on these articles, I don't presume to know what will happen, how, or when. The markets, like life, involve uncertainty. Live with it.

June 1, 2010 | Unregistered Commenterfallingman

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