A coordinated global round of interest rate cuts sent gold and silver sharply higher today. The Fed cut rates by 0.5 per cent, the highest inter-meeting cut permitted under its constitution.
This is highly inflationary, whether or not it acts as hoped to reduce the recession. If you look at the UK bailout package today this amounts to $875 billion in a combination of share purchases and new financial facilities for banks - even more than the controversial $700 billion US economic emergency package voted through by Congress last weekend.
If you add up the rescues being put together for the banking sector in Europe, and liquidity injections in Japan, Australia and even the UAE then several trillion dollars has already been committed to rescuing the global banking system.
This is probably no more than a deposit on the final bill. Those alarmist forecasters who say a derivative bailout will cost a total of $5-20 trillion look less unrealistic by the day.
Now what happens when a huge monetary inflation enters the system? We saw this in the 1970s and the late 2000s will be no different. After six to nine months a huge inflation emerges, especially if the medicine works to some extent and restores bank lending and gets economies moving.
That means your currency will be buying less than it did before because the amount of money in circulation will have increased. Will the amount of gold and silver in circulation have increased? Yes but only be a tiny percentage, the increase in production.
Therefore to defend against inflation your best bet is to buy precious metals. At the moment investors are piling into bonds and out of stocks. They are just fueling the next investment bubble.
What is a fixed coupon instrument worth with inflation roaring? it is depreciating in value. This is not the place to be invested, and bond holders will exit and join the only party in town: precious metals.
How long it takes for reality to dawn on investors is uncertain. But as you can see from the price of gold and silver today more and more people are getting it. Other articles on this website will guide you with how to gear up for rising gold and silver prices without borrowing.
