More Evidence of Stagflation

There have been several significant news stories in the financial world during the first week or so of August which are worth taking note of.

Despite the fact that gold has traded mostly sideways for some time now, there is a great deal of evidence to indicate that conditions are percolating below the surface that could lead to conditions that would be decidedly negative for the US dollar and financial assets and thus positive for gold investments.

For instance, the CEO of PIMCO, which is the parent of America’s largest bond fund, has warned that the world is headed for a severe recession not unlike the one that ended in 2009:

http://www.bloomberg.com/news/print/2012-08-02/pimco-s-el-erian-says-world-in-serious-slowdown.html

Readers will recall that the recession that ended in 2009 came about after a financial crisis which almost saw the meltdown of the US financial system. Readers should also recall that in the beginning of that episode gold languished as investors liquidated gold positions to cover losses elsewhere. Nevertheless, gold rebounded sharply and ended higher in both 2008 and 2009. Meanwhile, the stock market experienced its worst bear market in almost a decade.

Do not assume that gold investments only rise during periods of high inflation. That is one of the most common misconceptions surrounding gold investing. Historically, gold has provided financial insurance and profits during a variety of economic conditions, such as the severe recession of 2008-2009.

Speaking of inflation, it is true that gold tends to react favorably to high inflation. One of the chief components of wholesale and retail inflation is food. We are seeing more and more reports in the news that indicate that drought conditions will lead to higher food prices going forward:

http://www.euronews.com/2012/08/06/drought-threatens-world-food-price-rises/

Couple these two reports–the threat of recession and the threat of inflation–and you get something called stagflation, a condition we have covered on Mind Your Money to a great extent.

The last time the US economy experienced stagflation was in the 1973-75 time frame. During that period the price of gold tripled and the stock market fell 45%.

This creates a potential scenario in which investors should accumulate gold investments to protect their wealth from any of 3 possible threats:

1. Recession

2. Inflation

3. Both Recession and Inflation–Stagflation

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