The US Government and the US Federal Reserve downplay the threat of inflation. There are two primary reasons for this:
1) Acknowledging higher inflation would mean both revising GDP growth much lower (last quarter’s FDP growth would have been negative 1% if you accounted for the real increase in costs of living).
2) One of the primary arguments the Fed uses for why it can print hundreds of billions of Dollars without hurting consumers it because inflation remains “contained” or “transitory.”
Because of this, you won’t see any real acknowledgement of inflation by the US Government or the Fed until it’s far too late. Remember, one of the central goals for these organizations is to maintain confidence in the system.
Indeed, while the mainstream financial media continues to trumpet the wonders of stocks closing in on all-time highs, larger, more sophisticated players are preparing for a financial meltdown in a much larger market: bonds.
The cause? Inflation…
Goldman Sachs and other large financial entities have begun to warn their clients about an implosion in the bond market.
Goldman Sachs strategists have issued a big warning to clients hiding out in bond funds: You’re about to lose your shirt.
The reason: interest rates began rising this week, and if they return to the historical average yield of 3 percent, prices for long-term bonds will plummet. (By their very nature, fixed income prices must fall if rates rise.)
“A reversion of risk premiums to historical averages of 6% nominal rates (3% real rates and 3% inflation) would suggest estimated losses in portfolios with bond durations of 5 years of 25% or more,” equity strategist Robert D. Boroujerdi said in a note.
Goldman is not the only group be warning of a bond market implosion courtesy of rising inflation.
Finra warned investors today that if interest rates rise – as most market pros expect – bond investors could be slammed by long duration.
In an investor alert, the Financial Industry Regulatory Authority Inc. told investors that in the event of rising interest rates, “outstanding bonds, particularly those with a low interest rate and high duration may experience significant price drops.”
A bond fund with 10-year duration will decrease in value by 10% if rates rise one percentage point, the alert warns.
We get additional signs of the rising threat of inflation from the wave of Gold purchases made by Central Banks:
Worldwide gold demand in 2012 was another record high of $236.4 billion in the World Gold Council’s latest report. This was up 6% in value terms in the fourth quarter to $66.2 billion, the highest fourth quarter on record. Global gold demand in the fourth quarter of 2012 was up 4% to 1,195.9 tonnes.
Central bank buying for 2012 rose by 17% over 2011 to some 534.6 tonnes. As far as central bank gold buying, this was the highest level since 1964. Central bank purchases stood at 145 tonnes in the fourth quarter. That is up 9% from the fourth quarter of 2011, and the eighth consecutive quarter in which central banks were net purchasers of gol
Note… Central Banks, while talking down money printing and denying the presence of inflation, bought more Gold in 2012 that any year dating back to 1964. Indeed, However, since becoming net buyers of Gold in 2010, the Central Banks have been increasing their Gold purchases rapidly.
In 2010, Governments worldwide bought 77 tonnes of Gold. In 2011 it was 457 tonnes. And last year it was a whopping 535 tonnes. All told, they’ve accumulated 1,000 tonnes of Gold since 2Q09. At today’s price of $1600 per ounce, this stash is valued at over $56 billion.
The key issue here is not the amount ($56 billion in Gold purchases is nothing compared to the over $10 trillion in new money Central banks have printed since 2007), but the trend: Central Banks were net sellers of Gold for decades until 2010.
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