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Skarica: Fed Understates Inflationary Pressures

By    |   Tuesday, 27 March 2012 01:32 PM

The Federal Reserve is understating inflationary pressures to help the government keep its financial commitments to programs like Social Security and Medicare as cheap as possible, because such obligations are indexed to consumer-price indices, says David Skarica, editor of The Gold Stock Adviser newsletter and author of "The Great Super Cycle."

Inflation rates rose 0.4 percent in February from January but core inflation rates, which are stripped of volatile food and energy costs, rose only 0.1 percent. The Fed relies heavily on core inflation when determining monetary policy.

"I don't believe a lot of the government numbers, and I think the way they report inflation understates it for the purpose of keeping outlays in terms of Social Security and Medicare costs down," Skarica tells Moneynews.TV.

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"A lot of these costs are indexed to inflation, so if you keep inflation down, you can keep the increased year-over-year costs down. I believe that there are inflationary pressures, the government understates them, and they'll continue to go higher."

Monetary policy may be pushing up inflation rates.

The Fed has flooded the economy with liquidity, injecting some $2.3 trillion into the economy by purchasing assets such as Treasury bonds or mortgage-backed securities from banks with the aim of encouraging investment and hiring.

Such policies eventually stoke inflationary pressures down the road, which makes gold a sound investment. Loose monetary policies also pump up stock prices, which can cut into gold's gains, but that's just a short-term scenario, Skarica says.

In the end, if stock gains stem from Fed meddling and not from some underlying improvement to economic fundamentals, stick with gold, he says. It's the ultimate hedge against inflation and debased currencies.

"During the bull market for stocks in the ’80s and ’90s, when gold was in a bear market, there were certain times when gold outperformed when in the long-term, stocks were outperforming," Skarica says.

"Now I think the shoe is on the other foot, where gold is outperforming on the long term but you are still going to get these time periods when equities outperform."

While gold may be up around 17 percent on year, stock prices in the companies that mine the metal haven't gained as much, which has left many in the market scratching their heads.

That could change, Skarica says.

Eventually, if the metal continues to perform well, stock prices will catch up.

"It's really frustrating because we are seeing gold move higher, we're seeing a strong equities market but it's not transferring into the underlying stocks. I think at some point this has to change because you can't keep having a bull market in bullion, you can't have gold go to $2,000, for example, and stocks stay where they are today," Skarica says.

"People will say, 'Why am I going to pay $1,800 an ounce for gold when I can buy this miner priced for $1,200 gold?'"

Oil is a commodity to watch as well.

Oil prices are surging these days thanks in part to tensions between Iran and the West. The U.S., Western Europe and Israel are working to isolate Iran due to its nuclear ambitions.

Europe has set a July 1 date to embargo Iranian crude, while Tehran has said it has already halted some shipments to France and the U.K.
Iran has also threatened to close off the Strait of Hormuz, the narrow waterway connecting oil-rich Persian Gulf countries with the rest of the world, and worries have arisen that Israel may be considering unilateral attacks against Iran with or without the blessing of its allies.

While the Iran factor has pushed up crude prices and U.S. gasoline prices with them, other factors are supporting the commodity as well.

For one, demand in growing economic giants like China and India will keep prices high over the long term.

Furthermore, loose Fed monetary policies that have sent gold prices soaring will do the same for oil.
"Just like money printing and monetary stimulus moves up precious metals because it debases the currency, it helps all commodities because you're debasing paper money," Skarica says, adding crude oil prices could approach record-high levels seen in 2008.

"Oil goes up just because investors are looking for other places to put their money when you debase paper money."

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Tuesday, 27 March 2012 01:32 PM
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