Gold prices reach record high, confirming an expectation of inflation

Gold prices reached $1,500 per ounce for the first time ever. As gold prices rise, it becomes clear that investors are expecting inflation in the US.

Arko Datta / Reuters / File
Gold bars are displayed at bullion house in Mumbai in this December 3, 2009 file photograph. Gold prices hit record highs for a second day in a row on Tuesday and silver touched a 31-year peak. The gold and silver rally show that people are expecting inflation of the US dollar, writes guest blogger Stefan Karlsson.

Recently I discussed how the spread between the yield of regular 5 Year U.S. Treasury securities, and inflation-protected ones (TIPS) reached the highest levels ever during the existence of TIPS. Though the spread has gone down a few basis points since then, the spread remains higher than during for example the big spike in inflation during the first half of 2008, and it is more than 160 basis points higher than before QE2.

Confirming the picture that inflationary expectations is one the rise, the classic inflation hedge gold has now risen above the $1,500 per ounce level for the first time ever. Another precious metal sometimes viewed as an inflation hedge, silver, has gained even more and is now at its highest level since the great 1980 spike in the price of silver.

It is thus as clear as it can get that inflationary expectations are rising. Such expectations can be partly self-fulfilling because it reduces money demand, something that has a similar effect as an increase in money supply.

And because the United States unlike certain European countries has a rising money supply, this means that U.S. inflation will likely continue to rise.

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