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How Inflation has Bolstered Commodity Prices

Posted on | April 18, 2011 | 1 Comment

Perhaps the simplest of all financial misunderstandings is the idea that inflation is a “static” concept that exists in the same way for all markets and regions. This isn’t true. For example, just because a national inflation rate is reported at, say, 5%, doesn’t mean that every market and every region of the nation is experiencing 5% inflation.

Part of the nation could be experiencing 10% inflation, while other regions could be experiencing just 3%. Some markets could be seeing prices go down (like the real estate market) while other markets could be experiencing extreme inflation, like the silver and gold markets are currently.

In this article, we’ll be analyzing specifically different commodity markets to see how they’re fairing during our current inflationary and deflationary cycle.

  • Gold Prices. The price of gold has skyrocketed in the last few years, more out of fear from inflation than the actual inflation itself. Precious metals — including silver as discussed below — are almost always used by investors to hedge against future inflation and out of the fear of the  economic unknown.
  • Silver Prices. Silver has gone up in the last years to the extent that it’s absolutely unsustainable short of hyperinflation. For several years, silver prices have kept increasing. If you own silver, be on the lookout for major corrections or bear markets in the future — it wouldn’t be wrong to keep your eyes on live silver prices just to stay on the safe side.
  • Oil Prices. Crude oil prices have also gone up in the last few months due to inflation, even though a lot of the price jumps have been caused by political turmoil and fears of some OPEC countries shutting off oil exports.
  • Copper Prices. The price of copper is important for economic development and recovery because copper is found in just about all major appliances and electrical equipment. Copper prices probably won’t be dropping anytime soon, considering Chinese growth — inflated, of course — is still rushing forward.

Whenever an asset class is benefiting from inflation, you can almost always be sure it’s a bubble — and bubbles pop. Stock bubbles, real estate bubbles, and commodity bubbles have always popped in the past, and anyone who claims “this time it’s different” is probably wrong.


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