Financial markets have become increasingly obviously highly dependent on central bank policies. In a follow-up to Incrementum’s previous chartbook, Stoerferle and Valek unveil the following 50 slide pack of 25 incredible charts to crucially enable prudent investors to grasp the consequences of the interplay between monetary inflation and deflation. They introduce the term “monetary tectonics’ to describe the ‘tug of war’ raging between parabolically rising monetary base M0 driven by extreme easy monetary policy and shrinking monetary aggregate M2 and M3 due to credit deleveraging. Critically, Incrementum explains how this applies to gold buying decisions as they introduce their “inflation signal” indicator.
GoldSilverWorlds.com has done a great job of summarizing the key aspects (and the full chartbook is below)…
The authors introduce the term “monetary tectonics” as a metaphor for this war. Similar to tectonic plates under a volcano, monetary inflation and deflation is currently working against each other:
The following chart clearly shows that 2013 was a pivot year in which the monetary base M0 grew exponentially while net M2 (expressed on the chart line as M2 minus M0) declined significantly.
The chartbook shows several trend which confirm the deflationary monetary pressure:
On the other hand, inflationary pressure is present through the following trends:
The key conclusion of the research is that, due to the fractional reserve banking system and the dynamics of the ‘monetary tectonics’, inflationary and deflationary phases will alternate in the foreseeable future. Gold, being a monetary asset in the view of Austrian economics, tends to rise in inflationary periods and decline during times of disinflation.
The key take-away for investors is to position themselves accordingly and consider price declines as buying opportunities for the coming inflationary period. How comes one can be so sure that inflation is coming? Consider that the government must avoid deflation; it is a horror scenario for the following reasons:
Interesting to know, Stoeferle and Valk developed the “Incrementum Inflation Signal,” an indicator of how much monetary inflation reaches the real economy based on market and monetary indicators. According to the signal, investors should take positions according to the the rising, neutral or falling inflation trends.
Please check back for new articles and updates at Commoditytrademantra.com