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387: Massive US Inflation On Horizon - Gold and Oil As Hedge

07-16-2011 team

Debt Bubble: We have analyzed and researched for the last 6 years various bubbles, booms and busts (bull runs and bear runs) back to the year 1900 for analogy and can now provide our central base case forecasts for:

Inflation: It's a pretty bleak picture as you can see in the chart below. Let us explain. The US Treasury has boosted the money supply in the last three years by 300%, meanwhile keeping interest rates at record lows of close to 0.25%. This has led to speculation in the oil markets that is only just starting to feed through into higher oil prices and mild inflation. The US Fed appears paranoid about deflation, and is attempting to inflate the US economy with these two fiscal tools. Meanwhile debt levels have sky-rocketted to $14.3 Trillion, and the government deficit is $1.1 Trillion a year. This means the government is borrowing 40% of it's spending, since tax receipts only make up 60% of it's spending. This level of borrowing is totally unsustainable.

US Inflation Debt and Bonds Crisis

US Inflation Debt Bond Crisis
















Election: Meanwhile the Democrats are attempting to boost jobs and growth in the run up to the Election end 2012. The political infighting with the Republicans has not helped calm markets and credit rating agencies are being nervous about the AAA Treasuries rating. The Administration has about 16 months to make the economy look as rosy as possible - and it looks like the Republicans were taking things to the wire to put pressure on the current government before agreeing to increase the debt ceiling above $14.3 Trillion (reference to 2 August deadline for the agreement, before claims could be made that the government was in default). One reason why interest rates remain low, despite inflationary pressures building beneath the surface - is because the election is end 2012. If one looks at this cynically, one would expect rates to shoot up shortly after the end 2012 election, regardless of whether there is a new Administration or not - by then "chasing the tail of inflation".

US Govt Interest Payments: Because of the gigantic $14.3 Trillion debt, if interest rates rise above 10%, the US will not be able to afford the interest rate payments - such payment would then account for over 100% of government spending. At this point, the Fed would be forced to print far more money to pay for these debt payments and of course this would further stimulate inflation. It's a vicious circle, akin to being a drug fuelled addict. The printed money is the "prescription" and the debt is the "illness". Eventually the patient - e.g. the US economy - would collapse - or default. 

Liberals: The course has now been set by liberal minded economists and government - a huge inflation run up and bull market in gold and oil as these two investment options are used as a hedge against the declining dollar, mounting debt, recessionary pressures and defaults in both private business and governments/states across the USA. It's that simple. Only a severe tightening now could save the day, but the shear size of the debt accumulated since 2008 would make it difficult - because if rates were to rise to what is required - e.g. 10%, the government would not be able to afford to pay it's debts. Catch 22. 

Interest Rate To Spike End 2012:  Do not expect to see interest rate rises until just after the election - when the very bad news will come out - at this point - inflation will probably be at ~8% and start a rapid rise. The average US citizen will be zapped by large interest rate hikes. Mortgage rates will sky-rocket. Mortgages will become very high, and people will foreclose and move into rented accommodation. Rents will also sky-rocket because of a shortage of landlords and higher housing costs. There will be many empty properties though - waiting for banks to sell these properties onwards - with few buyers confident enough to purchase and banks unable to lend.

Gold: Only 20% of gold is purchased by Americans. US investors have sought refuge historically in the dollar, the global currency and up to 2007 a safe haven. A reason for the US citizen's reluctance to purchase gold is their distrust of gold because in the last Great Depression, the US government made it unlawful to hold gold. Furthermore, President Nixon moved off gold as the standard - believing the US economy was strong enough globally to retain its prestigious status s the world reserve currency. Things are now changing with China's emergence. In the 1930s, the US Government forced people to sell their gold to the Government at reduced prices.  80% of gold is purchased by other world nations, and as inflation takes hold, the US dollar will further decline as the Fed prints more money - there is frankly only one way that gold is heading. It's up. This is just the start of the gold bull run, not the end. We think gold will rise for the next five years at least, possibly longer. We would expect gold prices to double by 2016. We are very confident of this prediction. Gold is 60% of the way through a 17.5 year bull run that might end around 2017. Indeed, it is a bubble forming, and this bubble will go pop, but not for many years. Yes, there may be down corrections on the way, possibly as high as 40% declines, but essentially we expect gold to rise to well over $2500/lb by 2015.

Gold Price Forecast 

Gold Price Forecast















Oil: We have written extensively about oil before in many Special Reports - as most of you will be aware. No change here. Oil prices will continue to rise - albeit there will also be corrections on the way up - possibly as high as -25%. The tightening of the supply of light sweet crude in world markets is now getting very serious - so serious that the EIA (and US Gov't) released 60 million barrels from their Strategic Reserves a few weeks ago. The EIA see a shortfall if 1.3 mln bbls/day of light sweet crude at this time, with a projection of a worsening situation into Q3 2011. This is only the third time these reserves have been released, and there is not even any blockade or war. Consistent with this analysis, Goldman Sachs recently issued a higher oil price forecast for H2 2011 onwards based on tightening of supplies as the non-OECD nation's oil demand sky-rockets 1.3 mln bbl/day by a further end 2011.

Saudi Arabia: Saudi has unilaterally increased production by 0.7 mln bbls/day this month after failing to agree to any output increase in last month's OPEC meeting. But half of this amount is being used to fuel electric power plants and desalination plants to feed its gigantically increasing population - all buying cars, coolers and using more fresh water. The Saudi's oil consumption will sky-rocket to 2.7 mln bbls/day by 2015 with a population of 50 million - and its net exports we confidently predict, will actually decrease - not increase. Yes, Saudi production may rise slightly, but its exports will drop. This seems to have been lost by most analysts regrettably. This is a crisis for the USA though although Saudi Arabia will be trying its reasonable hardest to keep rates high, it will have its own priorities with fueling social spending plans, growth, clean water, cars - and the surpluses will be increasing despite lower exports because of rising oil prices. Saudi Arabia will also not be able to help boost light sweet crude, since its extra capacity is high and often sulphurous crudes - unloved by many refineries.

Russian oil production is also now declining - and it instigated tax breaks to try and stimulate supply increases to keep production at 10 mln bbl/day, but it's not likely to help arrest a terminal decline from now onwards. Peak Russian Oil Production was Feb 2011 - and the slide has begun, albeit it won't be dramatic - may be a 1.5% per annum production decline.

Oil Price Forecast - TrenOil Price Forecastd  albeit some corrects downwards by 25% might occur in an overall bull run
















Saudi Oil Production Export Decline Consumption Increase "Peak Oil Exports" Proprietary Modelling

Saudi Oil Production Export Decline Consumption Increase-Peak Oil Modelling Peak Exports















US Investor Strategy: So what does this mean for the US Investor. It means the dollar will decline, interest rates skyrocket, unemployment will rise, defaults in the private sector increase, oil prices will rise a lot further, gold will sky-rocket and house prices will drop further. The debt will be eroded by high inflation, but severe pain will be felt by higher interest rates. Be prepared for far high mortgage rates. Make sure you have plenty of cash for such payments during this period. Consider selling properties. Pay down higher cost credit card bills. Switched to fixed rates mortgages now. Buy gold. Buy oil. Buy silver. Don't by any stocks in any other type of US company since the stock market is likely to crash at least 25% in the next few years, and possibly as much as 50-60% in inflation adjusted terms by mid 2017 according to our analysis.

End of US Currency Dominance: As more money is printed leading to a decline in the value of the dollar, OPEC will naturally wish to increase oil prices to compensate for the declining value of the dollar, which oil is of course traded in. This is a further problem for the USA because the printing money leads to still higher oil prices, regardless of the political rhetoric - and US oil import bills will escalate further. The printed money and increased liquidity of course also leads to increase speculation on the markets by hedge funds and traders - this will also drive up oil prices. Oil is used as a hedge against inflation, another reason why prices will rise. Meanwhile China is trying to build its own Strategic Oil Reserves, as is India, so this is also creating a pull on demand. Hence there should be a net flow of light sweet crude from OECD Strategic Reserves to Chinese and Indian Strategic Reserves -a form of transfer of physical wealth or oil reserves. Anyone that thinks China will ease off its oil usage is being unrealistic - China has 1.5 billion people all wanting to own cars and run electric appliances just like Americans. So as oil demand stagnates in the USA, oil growth will continue in China and India. These economies will become so huge that they will be almost self reliant as their consumer economies expand - just like the USA was in the 1960s before it started importing oil.

Reputation: The US dollar has dominated world trade for 70 years, ever since the demise of UK Sterling after World War II. Oil is priced in dollars, as are metals and other commodities. If nations and entities like OPEC dump the dollar because of its continual decline in value, and start trading in a basket of currencies - as seems likely in the next ten years, this would likely further reduce the dollar value by up to 50% - and lead to further inflationary pressures as oil and other import bills soar. The USA is living off historical goodwill, but foreign investors are becoming tired of the dollar decline. If the credit rating agencies downgrade US Treasuries, as seems likely, then the dollar will no longer be considered a safe haven and interest rates will sky-rocket. It is only because of this goodwill that the US Fed has been able to continue printing money and get away with it - but this will ultimately run out as inflation takes hold.

Credit Agencies: The Europeans have been critical of US based credit agencies recently as they continue to downgrade Greece, Italy, Portugal, Ireland and Spain - because of high deficits, insufficient deficit reduction plans and low growth. Meanwhile these same agencies have kept the US Dollar on a AAA rating - unscathed. Objectively, one can understand the European frustrations as markets have turned against these countries in part due to credit downgrades, thence requiring gigantic bail-out. But the USA has similar deficits, no spending reduction plans and continue to print money. There is a feeling that the Credit Agencies are too close to the US business and government - and are no longer objective when viewed globally. Rather a touchy subject - but ultimately the pressure to downgrade the USA will increase and it will be hard for the Credit Rating Agencies to justify AAA soon. Not good for the global economy and US stock market moving forwards.

Disillusioned Foreign Dollar Investors: As foreign governments become disillusioned with the weakening dollar, and disillusioned with their dollar investments, they will also switch to other currencies - safe havens like Norway, Switzerland, Canada and Australia - or demand pricing of commodities in other currencies - countries with currencies backed by oil/gas/metals reserves. This will also help push up interest rates in the USA - to levels that require the US to default, or at least restructure their loans. 

Living Beyond Means - Getting Fat: The bottom line is, the USA has been living way beyond its means for far too many years. Private and now public debt levels have reached gigantic bubble proportions, and the only reason why the USA remains solvent at this time is because foreign investors have stayed loyal to the dollar. But when inflation takes off, and more money has to be printed, these investors will demand far higher interest rates as an insurance against default - similar to Greece and now Italy, Spain, Ireland and Portugal. As the pack leave in droves, no one will have any way to save the dollar and US economy from debt collapse and rampant inflation. It's not a pretty picture, but from end 2012 onwards, we firmly believe a crisis will break out that will make the mid 2008 private banking crisis look tame. This will mark:

Yes, it will be a "blow-off" and the canny investors will be the ones that time the gold and oil rise perfectly to get out just before the final peak - sometime between 2013 and 2017. It will be an amazing opportunity to shift out of stocks and property, and into commodities - oil, gold, silver, copper, food, wood - as this final blow-off occurs. Most people will probably loose the bulk of their wealth through the ravages of inflation and bankruptcies. But those holding rental property with little debt, gold and oil - could see their net worth skyrocket off the back of the commodities bull blow-off.  

Backwards: It's a pretty bleak picture, but Americans will still be very wealthy compared to the average person in the world. Even if the economy contracts by 50% of its original size on an inflation adjusted basis, it will still be a $7.5 Trillion annual GDP economy - very sizable.

Commodities Bull - Long: As you can see, here at, we are certainly not buying any US property at the moment. We much prefer oil, gold and silver - either holding physical commodities, contracts or purchasing stock in the best small growth companies.

Train Has Left The Station: We're being brutally honest here - telling it like we see it - no prediction is perfect - but we hope you get the message - there will be massive inflation, the train has left the station and it cannot return - it's too late. It's inflation all the way.  We hope this Special Report has given you some helpful insights. If you have any comments, please contact us on .


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