MarketWatch has a commentary titled Once bitten, twice shy: The global economy is at a fragile juncture¹ I have come to believe that the words “global economy” point to an idea that really does not exist: economies exist within a given market based on more than just the creation of goods and labor and the exchange of money. The profit within an economy is based on the supply and demand of two items: the actual item or labor to be sold (which everyone takes note of) and the amount of money within that economy or market.

It is the latter item that many investors fail to notice. If we look at the economy from a global perspective, we often fail to account for the actual amount of money that exists in total. We also fail to account for the amount of money that will be created between the time we make an investment (”purchase a stock”) and then time we sell that investment. I have invested in stocks over the years, almost a decade now, and the more I look at the money supply in that time period, the more I realize that my 100% price increase over all those years may actually be a loss to me. Not only have I not really made a profit on the investment (in terms of the value of the money when I bought a stock and today), I also have not been able to use that capital to invest in myself. A.B. Dada has often said that one needs to account for the growth of the money supply before assessing a profit, but it is only now that I have actually looked at consumer, housing and fuel prices 10 years ago and today, and seen that all my profits in the stock market were wiped out by the decline in value of not just the U.S. dollar but every currency.

In U.S. new today we see that Federal Reserve chairman Ben Bernanke sees that the U.S. economy is slowing and that inflation’s rise should come to a halt. When you look at the realities of the Federal Reserve (they create new money all the time which helps the banking insiders while hurting everyone else very slowly and quietly), you see that inflation never does really halt or stop rising. In physics, there are two terms one must be aware of: acceleration and impulse. Acceleration means the change in speed: if you are driving 50 MPH and accelerate your vehicle to 60 MPH, your acceleration is a 10 MPH change over a period of time. Inflation is like acceleration: it is always accelerating, money is always losing value. Impulse, though, is the change in accelerating: if you are accelerating from 50 MPH to 60 MPH in 1 minute, you are accelerating 10 MPH / minute. If you then accelerate from 60 MPH to 80 MPH in the next minute, you are accelerating 20 MPH / minute, but your impulse is 10 MPH / minute. You’ve accelerated your acceleration.

The dollar is always losing value: always! When the government says that inflation is controlled, it means that it isn’t accelerating more than a certain percentage a year. It is still accelerating (decreasing the value of the dollar), but it is doing so at an expected rate that many people consider acceptable. It is when the impulse is positive that Bernanke and the market seems to show fear: when the decline in value of the dollar is growing and changing much quicker than previously. Immediately the market listened to Bernanke, and immediately investors believed the great liar of today and put more into the markets that are heavily based on the dollar holding value. It won’t.

In my area of Portland, I see retail stores closing all the time, even large national chains. Commercial rental properties are so expensive that new businesses can not take the risk, and national chains refuse to enter the market if they can’t buy the property. Even Apple was forced out of my market because of excessive government regulations when they were unable to buy a piece of property and rebuild it from scratch.² Most local businesses don’t even want to chance it. If Bernanke believes that inflation’s acceleration will slow, why are so many businesses failing, and why are foreclosures growing nationwide? Surely there is a delay between when the economy rights itself and things get better, but I don’t know anyone who is feeling security for the future.

And where will we see the acceleration of inflation slow? Economic indicators show that consumer prices rose another 0.3% this month for the fourth straight month, with housing starts dropping 5.3% for the same time period.³ Wholesale prices, including food, rose 0.5% in that time frame, which could force prices higher for the next month as retail prices follow wholesale prices later.⁴ As prices outgain income, more and more families will be facing bankruptcy in their attempts to stay ahead of not just their debt burdens but their upcoming costs of living.

Bankruptcy isn’t just faced by individuals and corporations. The U.S.’s own central bank seems to think that the U.S. itself could face bankruptcy, as research by Federal Reserve Bank of St. Louis shows.⁵ Professor Laurence Kotlikoff works for the Federal Reserve of St. Louis and he believes that a ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency. He goes on to say the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds’.

Where is the good news? Some analysts are hoping to see gold break US$1000 per ounce by year’s end, which is great news for those holding the brilliant metal.⁶ With recent gold profit taking forcing the metal from the US$700s down to the mid US$500s and back up to the mid US$650s, there has been great volatility that may have scared off the average investor/saver. Yet as A.B. Dada always says, inflation gains lost in one market always mean there will be inflation in another market: the money never disappears, it just wrecks more markets along its path. Where did those profits likely go? Check nickel, which has gained nearly 50% in recent weeks.⁷

Discuss this economic report at the gold investment forum.

The last time the country experienced near out-of-control inflation was during President Carter’s reign. Carter appointed Paul Volcker as the Federal Reserve chairman and Volcker kept raising the benchmark interest rate until inflation slowed from a record high of 13 percent. As many economy students know, this has a tendency to put the overall economy into what some might consider a recession, although in reality we know that it is not recession we are seeing but an economy correction that must take place. When the Federal Reserve creates too much new money over time, the markets seem to appreciate and look profitable. In reality, they are not truly profitable but bubbled.

Paul Volcker who is now 78 was interviewed on the Bloomberg TV show Political Capital with Al Hunt He says that the time he had as chairman of the Fed is easier than what current chairman Ben Bernanke faces:¹ “While the economic situation was much worse, it was easier to act because it was clear what the enemy was.”

Gold markets may see a downward trended correction with a decreased supply from a new State-disincentive for gold purchases as Pakistan imposes a withholding tax on gold purchases.² This withholding tax has completely shut down gold imports into the popular gold jewelry-producing country: They said that that the commercial importers of gold have immediately cancelled the already booked orders and halted the import process from different countries with immediate effect from 1st of this month. With this large physical demand virtually turned off, it may have a fast effect on prices of gold over the short run, even with the Indu-region holiday season to prepare for.

Another supply-increase is coming from Peru, as their economy sees a 6.5% expansion based on new gold supply production.³ Some mines in the region saw a 10% increase in production, which can put a downward pressure on gold’s market price if demand does not match the new supply.

The Russian Ruble has introduced free convertibility this month, and they are also fast-tracking the establishment of a domestic oil bourse. With free convertibility of the Ruble as well as a hope for a new oil bourse in the region, this might put a new demand on the Ruble for purchasing of oil from the domestic bourse.⁴ This would decrease demand for the international petro-dollar, causing a possible increase in the USD price of gold even if other currencies show stronger in pricing against their currency. Iran has always spoken of creating an alternative oil bourse instead of the current monopoly in petrodollars.

Iran’s oil bourse might be set for September, 2006, according to some non-mainstream press reports:⁵ The building that will house the oil bourse has reportedly already been purchased in the southern Iranian island of Kish. The Iranian oil bourse is theorized to be pegged to a petroeuro, which would also decrease demand for the US petrodollar.

Discuss this gold news report at the gold investment forum.