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Oil and Inflation: “Soaring Inflation Leads to Rising Bond, Oil and Gold Prices”

Posted November 23, 2007

“When the price of gold goes up, the value of the stuff that buys it – paper – goes down. People are buying gold because they fear inflation is going to get worse. Typically, gold holds its value in an inflationary trend.” — Bill Bonner

by Bill Bonner, Daily Reckoning Australia and TFN

Blogger’s Note: Its it the chicken? Or is it the egg? Agora founder and president Bill Bonner ponders how soaring inflation leads to rising bond and commodities prices. I always had it the other way round — that soaring commodities prices eventually lead to higher inflation.

Baltimore — (TFN): We’re watching the news carefully. Why? Because we think something is going to happen. The markets are in an uncomfortable – and potentially explosive – position. On the one side, the unstoppable force of inflation seems ready to collide into the immoveable object of falling asset prices.

What will happen when they meet?

We don’t know, but we want to be in the front row when it does.

Yesterday, the price of oil rose to US$99. That’s inflation, dear reader. The price of oil affects almost everything in the economy – everything that uses power…and everything that moves. Meanwhile, the US dollar continues to slide. That, too, is inflationary.

Because as the dollar goes down, prices of things that dollars buy go up. Lower dollar = higher consumer prices, especially for imports, which are a huge part of the US retail market.

What else is inflationary? Well, the price of gold rose over US$800 in the aftermarket yesterday. Gold is real money. When the price of gold goes up, the value of the stuff that buys it – paper – goes down. People are buying gold because they fear inflation is going to get worse. Typically, gold holds its value in an inflationary trend. Then, it rises in real terms…as more and more people turn to it in order to protect themselves. Finally, gold skyrockets as speculators try to get rich on it. So far, we’ve only seen the beginning of this trend. If we’re right, there’s a lot more inflation where that US$800 gold came from.

Read on here….

***Don’t forget to watch this weekend’s Smart Trading Action Alert: Smart Trading Action Alert: Given the beating some blue chips have taken in recent weeks, select small-cap stocks now provide opportunities for safe profits. Ian Cooper explains.

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