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The price of gold climbed to a new all-time high of $1,284 per ounce on Monday morning, suggesting that investors are very concerned about inflation that is eroding the value of paper-currencies.
To be able to recognize the massive inflation that is occurring now, one has to distinguish between the various definitions of inflation: there is consumer price inflation, asset price inflation, and monetary inflation. While the first kind of inflation (CPI) is the probably the most widely recognized kind of "inflation", it is the latter (monetary) that is the most important with respect to gold, and the major source of price inflation.
Although different schools of economics each have their own definitions and explanations for inflation, they generally agree that an overly strong growth in the supply of money is a major factor. The Austrian School says that the growth-rate of monetary units is the actual inflation, while the Keynesians have various other explanations which cannot be quantified in an exact way, like "demand-pull" or "cost-push". Indeed, the Federal Reserve stopped releasing data on the growth rate of the money supply (as measured by M3) in 2006 -- subsequently, the central bank was criticized for this measure, suggesting it was trying to hide inflationary trends.
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[The Fed still reports money supply as measured by "M1" (which is defined as the sum that is held outside banks, travelers checks, checking accounts (excluding demand deposits), minus the amount of money in the Federal Reserve float. Another measure, "M2" is the sum of: M1, plus savings deposits (including money market accounts from which no checks can be written), small-denomination time deposits (less than $100,000), and retirement accounts. "M3" is the sum of "M2" plus large time deposits (above $100,000), eurodollar deposits, dollars held in foreign offices of U.S. banks, and institutional money market funds.)
The renowned fund manager Marc Faber -- who uses Austrian economics for his forecasts, and rose to fame by accurately predicting the stock market crash of 1987 and later 2008 -- has been heavily criticizing the Federal Reserve for its "inflationary actions." He views the Fed's policies as simply "money-printing" -- an inflationary move in Faber's opinion.
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Consequently, Faber is very bullish on gold, advising investors to buy the precious metal as a part of their investment portfolios. Purchasing gold has proven to be a wise piece of investment advice over the long-term, given that the price of gold has increased by five-fold over the past ten years from a low of $250 to more than $1,280 now, while many other assets, especially stocks and real estate, have suffered losses.
In fact, on Friday, Faber said the current rally in bullion prices did not appear excessive to him, given the inflationary backdrop and monetary policies of central banks, and that he would continue to buy gold at current prices.
“Given all the unfunded liabilities and the money printing in the world and the size of the financial assets in the world, I don’t think we are in a bubble,” Faber told a CLSA Investors’ Forum 2010 in Hong Kong.
However, Faber cautioned that gold will likely undergo some significant price swings and corrections while nonetheless maintaining its upward price trend.
