Money printing is good for gold, silver and oil but what about the real economy?

All over the world the central banks are printing money like it just came into fashion. The printing is disguised. China raises its reserve requirements for banks. The Bank of England does another $80 billion in QE. Euro leaders meet to discuss a $170 billion second Greek bailout.

This is all money printing by central banks. Money or additional liquidity is being injected into the global economy. When will it stop? Can it be stopped?

China slowdown

Reading the economic commentators on China, for example, and it is clear that the Middle Kingdom can do a lot more. Why will it do so? Well to ease the pain of an economic slowdown this year – auto and housing sales are tumbling and exports in decline.

Then again China is also feeling the impact of monetary inflation in the global economy with sharp rises in food and energy prices. This is where the real economy gets impacted by central banks printing more and more money.

They can prevent debts from overwhelming an economy and forcing deflation of asset prices. But they cannot eliminate the nasty side effect of inflation which can cause the patient almost as much distress, particularly at the lower end of the scale.

The riots in Athens or Cairo show what this looks like in the real economy. You can squeeze the standard-of-living of the poor but they will fight back. This is also bad news for the real economy because those impacted by food and energy inflation have less to spend on other things, like foreign cars in China.

Winning assets

From an investment perspective gold, silver and oil will do well in an era of money printing and not much else. Stock market speculators can use cheap money to drive up equity prices for a while. But inflation gnaws away on the profitability of companies by pushing up input costs and depressing sales and that means lower share prices in time.

Gold, silver and oil go up because of fixed supply and the desire by investors to get out of devaluing currencies. Rising oil prices are particularly bad for the real economy and will always eventually cause a recession. This is probably not a good year to choose to provoke a showdown with Iran from the point of view of the real economy.

The ArabianMoney investment newsletter is recommending instruments to allow readers to prosper in this environment and these are often options not favored by advisers more interested in their own commissions than their clients’ interests. Rising oil prices can only be good for the UAE where we are based and investment here must therefore also make sense.

Source: GoldSeek.com, 21 February 2012