Dear reader

This is the vicious cycle:

Rising prices cause unrest and unrest causes supply shortages which causes rising prices!

So if rising prices become so high that it slows the growth of the world economy we could be heading for a stagflation period. This is one of many reasons why you should buy gold.

I am just warning you of the possibility of stagflation occurrence especially if the unrest continues and the oil price continues to remain at high levels. Currently the market is showing serious signs of uncertainty and the gold price continues to rise.

What is stagflation?

Stagflation occurs after a recession when inflation is high and economic growth (GDP) is low.  It causes a problem for governments attempting to fight inflation. The actions the government does to fight inflation can worsen economic stagnation and vice versa.

Governments attempt to fight off a recession by increasing the productivity of the economy. One way of increasing this productivity is to reduce interest rates. Interest rates are the borrowing costs for companies. With reduced borrowing costs companies can increase productivity. But the reduction of interest rates causes money supply to increase. Increased money supply also causes inflation.

Stagflation can be the result of an unfavourable supply shock

Commodity prices can act as a determining factor for inflation and supply shocks. When demand for commodities outweighs the supply, commodity prices rise. In the past months natural disasters and bad weather conditions have been the cause of serious shortages for many commodities internationally. Currently unrest in Northern Africa and the spreading contagion towards the Middle East has had a serious effect on the oil price and this has magnified the effect of rising prices on the other commodities.
With a high oil price the cost of fuel becomes expensive. This causes the production of goods to become expensive and increases the possibility of an inflation rate above expectations.

Unrest, and supply shortage from bad weather cause rising prices...

So what can you do to protect yourself from this abnormality and make profits at the same time?
Investing in gold can protect your portfolio from uncertainty on the financial markets. The financial markets have made good gains over this past year and it could be the time for a pull back. By investing in gold you will be solidifying your investments till the next good buying opportunity arises.

Either way whether the stagflation occurs or not the market makes a pullback in times of uncertainty and this drives the gold price higher. There are many risks in the current world economic conditions. There is also a possibility governments are going to raise interest rates to fight off inflation. This means that you will be able to make good profits on gold. So don’t be a sitting duck, increase your exposure to gold to reduce uncertainty and avoid losses if more bad news is to come.

Below is the past price chart for gold over a ten year period. Notice how gold prices are rising at an accelerating rate.

Yours in investing

Malcolm Riley
FSPInvest Analyst
www.fspinvest.co.za