Why Gold Went Up $50 Yesterday

Well surprise, surprise, surprise. 

Gold bullion rallied just under $50.00 an ounce yesterday…and nobody expected it. (Okay, maybe just me. In a single day yesterday, my portfolio went up by twice the amount the stock market has risen in all of 2014.) 

Going through all the major financial web sites, I read story after story yesterday on why gold was rising so fast. They were all wrong; just reporters grabbing at straws, trying to explain something they know very little about.

 As I started writing in these pages in 2014, inflation is becoming a real problem in America. Years ago, I started writing about how all this money the Federal Reserve is creating out of thin air would become inflationary. That’s exactly what is starting to happen now. 

Why is the Fed starting to pull back on its money printing operation with the goal of being out of the money printing business by the end of this year? Why is the Fed telling us that after keeping interest rates near zero for years, by the end of next year, the federal funds rate will move up to 1.13% and by the end of the following year, it will move to 2.5%?

 In my opinion, we are being told this because the powers that be see inflation in the cards, and they are working on trying to curb rapid inflation before it happens. And if there is something gold thrives on, it is inflation.

 Even the manipulated government statistics are now pointing to inflation. 

The Bureau of Labor Statistics reports prices in the U.S. economy increased by 0.4% in May after increasing 0.3% in April. (Source: Bureau of Labor Statistics, June 17, 2014.) This increase in the Consumer Price Index (CPI) was the biggest since February of 2013. 

With this rise in prices, inflation in the past 12 months was 2.1%. If we assume that going forward, the new monthly norm for inflation will be 0.3%–0.4%, then in the next 12 months, we are looking at inflation of 3.6%–4.8%. Gold loves inflation, plain and simple! 

The more there is of a currency in a financial system, the higher the chances of inflation; and the velocity of money is a big part of that. 

Without getting too technical, the velocity of money is simply how many times one dollar is used in an economy. And the more that dollar is used, the greater the chance of inflation. 

As it stands, we see the velocity of money is sitting at its lowest level ever recorded. In the first quarter of 2014, velocity of money in the U.S. economy was 1.4. This means one dollar was used only 1.4 times. Back in the 1980s, the velocity of money was 3.0. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 17, 2014.)

 Why has the velocity of money been so low? 

When the Federal Reserve started printing money in 2009 and giving it to the big banks in hopes they would lend it out to customers, the banks (being too worried about the U.S. economy) didn’t lend the money out. Instead, they took the money and bought safe government bonds (as has been well documented in these pages).

 But finally, after five years, banks are loosening up and lending again. Last month, commercial and industrial loans at all commercial banks in the U.S. economy stood at $1.69 trillion. This was the highest amount in years. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 17, 2014.) 

As the banks start lending, the velocity of money increases and that just brings more inflation. 

I have said it many times before: inflation in the U.S. economy is going to be a major problem. And after roughly five years, inflation is picking up. The perfect inflation storm is brewing as even the velocity of money picks up.

 Gold is the best hedge against inflation. That’s why it’s an important part of any investment portfolio. And those gold mining stocks…they are still looking very cheap. 

This article Why Gold Went Up $50 Yesterday was originally posted at Profit Confidential