All Roads Lead to Inflation

At this point, all roads lead to inflation. This may be strange given that there are strong deflationary forces brought about by the deleveraging from a balance sheet recession still in the system.

But if you take a step back. The Fed is implicitly (if not explicitly) trying to create it. The third world is experiencing it. Risky asset prices are reflecting it. The markets are beginning to come around to it.

We're playing with fire here.

Most historical studies indicate that inflation is generally positive for risky assets, but too much inflation is bad. Hyperinflation is another thing all together, leading to the wipe out of an existing order/system. But even if we don't see hyperinflation, only inflation, there are assets that provide a better store of value than others. What inflation does is force you to do something. You can't just sit there (and especially not at the moment with cash and bond yields so low).

If it true that all roads lead to inflation, then how can investors best preserve their purchasing power? What stores of value will help protect investors against inflation? How should investors best approach this problem? Investors need to take greater risk with their asset allocation. Being fearful and leaving money in cash or bonds is perhaps the worst thing they can do.

This is serious

The stunning rise of gold over the past 8 years is serious. It is signaling an end to the existing monetary and economic order. Now that might be quite some time away, but it's rise reflects concern over the value of paper currencies.

I have completely missed this run-up. I am a market child of the 90s. By the time I entered the industry, gold had already been falling for 10 years and had another ten years to fall. My first boss was a persecuted goldbug from Switzerland. He had sailed to New Zealand on a yacht and decided to stay and play in the newly deregulated financial markets (nothing like cowboy markets to attract punters). I took a look at gold at the time and dismissed it for the same reason Warren Buffett dismisses it (as a quaint historical artifact with limited intrinsic, and economic value). To add insult to injury, the case for gold was often being touted by "the end is nigh" folks on the fringe. Their arguments were reasonable, but in order for their predictions to come to pass, massive social and economic upheaval must occur. A collapse of the fiat monetary system couldn't happen! Could it? The longer gold underperformed, the further it fell from favor. Alas, if only I had listened to those prophets from the wilderness (aka the Austrians) and taken a little gold on board (just for insurance sake).

But, as with most things in the markets. There is nothing new under the sun. What comes around, goes around, and it is presently the time for gold to shine.

Hopefully I've learned a lesson here. But I wouldn 't count on it (can you say hard headed). I still don't buy the economic argument for gold, and don't see why gold, as compared to many other goods, is "the chosen" store of value. But what I think doesn't matter. It is what the market thinks, that matters. And gold is definitely the asset du jour.

A Problem, an Issue, or a Conundrum

Actually it is probably more an issue and/or a problem, rather than a conundrum.

I am referring to the fact that financial markets like gold and oil are relatively small compared to traditional markets like equities and bonds.

The changing face of market players (the rise of hedge funds, SWFs, and ETFs), along with changing perspectives on asset allocation and investment strategy, has led to the prospect of significant demand/supply imbalances.

In other words, the flow of funds can unhinge a market from its fundamentals, aka bubble.