The simple definition of inflation is the printing of money.  Those in the media, government and Federal Reserve would like us to believe that inflation is the rising of prices.  Typically you will hear this described as “price inflation” rather than “monetary inflation” which more accurately describes what is really going on.  According to the government, at this point inflation is not an issue.  This is because the CPI does not include food, energy, and healthcare and makes exceptions for advances in technology; therefore the CPI is always grossly understated.

Why we haven’t seen significant “price inflation” yet is due to the fact that money is not being lent out.  Banks have around $1 trillion in reserves held with the Federal Reserve.  Credit has gotten much tighter, unemployment has increased and overall credit worthiness has declined.  These set of circumstances has kept money on the sidelines of the economy.  When this money floods the system we will most certainly see price inflation.

As far as monetary inflation is concerned we have seen an enormous amount of this here is the US.  The M3 money supply has increased more than 10 fold since the 70’s and I have heard figures that the Fed has printed 2.5 times the money supply in the last 18 months with no signs of stopping.  The Bush administration was running a deficit of about $1.7 billion per day, whereas the Obama administration is running about $4.5 billion a day.  It took 204 years to create the first $1 trillion; we will create the next $1 trillion within the first seven months of 2010.  This is a staggering amount of monetary inflation.

How does all of this affect gold prices?  Gold is a hedge against inflation.  In dollar terms gold has consistently proven to hold up to inflation.  For example, 100 years ago an ounce of gold could buy a nice men’s suit, today an ounce of gold will still buy a nice men’s suit.  So as price inflation heats up expect more people to jump on the gold band wagon.  This demand will create higher and higher highs in the price of gold.

Jim Rickards said, “It is the case that real debt cannot be repaid through any feasible combination of growth and taxes.”  Therefore the only option is to continue to print money which will lead to inflation, then hyperinflation and then collapse of the dollar.  Gold will do progressively better in each one of these circumstances.  So look for the rising gold trend to continue if for no other reason than the government is printing money at an alarming rate.