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Gold prices are on the tear these days along with gold futures a quick time~in brief} touched one more record recently on above $1,249 an oz – a level that might have appeared a distant prospect just a year past.

Yet there is no sign of resurgent consumer rate inflation in U.S. economy, or in the economies of most other countries.

Now around, therefore, gold isn't serving like a protection anti inflation, the way it did in the 1970s. However an increase in gold rates that is so sustained must mean something. Divining that meaning will inform us what we can expect from the global economy plus markets in the future.

While we have not experienced consumer price inflation, in the previous fifteen years we have seen an record increase in the U.S. as well as international money supplies. From 1995 to 2008, the U.S. broad money supply expanded 40% quicker than the country's gross domestic product (GDP).

Subsequently, in late 2008, the U.S. Federal Reserve fully opened the monetary spigots doubling the monetary base in the matter of weeks. Internationally, almost all nations began monetary expansion around 2000, plus opened the spigots even further in late 2008.

You can observe the outcome in world central bank reserves: They have expanded with a rate of more than 16% per annum since 1998, and stood at an aggregate $8.09 trillion in the end of last year.

Now consider those central banks for one minute. They control an exceptional sum of cash, almost all of which can be deployed in short-term foreign currency assets.

That leaves the central bankers with an unpopular choice:

They can deposit their money in U.S. dollars, which are matter to a record budget arrears that's showing no signal of being brought under control.

They could put their money in euros – plus watch the European governments as well as the European Central Bank (ECB) organize a bailout adding up $1 trillion used for a nation – Greece – whose GDP is only one third of that amount.

They can put their money in Japan, a country whose public debt exceeds 200% of GDP, that is as well running vast budget deficits and that is blessed through a government who really wants to run even larger deficits in addition to is not fulfilled through interest rates approximately zero.

otherwise they could put their money in China, a country whose currency is not freely traded plus wherever inflation is flattering a genuine trouble.

Of course, there are a couple of well-run nations like Canada and Australia, but among them they are distant very small to give a home for anything close to $8 trillion.

Otherwise, central bankers can place their money in gold – an asset that has increased in price by more than 20% yearly since 2000, which indicates no signs of ceasing to do so.

Rationally speaking, those central bankers will place at least part of their funds in gold.

The problem is that – even at these exalted rates – the annual output of gold is just $120 billion and the overall world stock of gold is worth only $6 trillion. So with the world's central banks stepping up buying, mostly clandestinely, you are able to see that the gold price is more likely to go off much, a lot higher.

The dangers of investment in gold or mining futures have though improved within the previous couple of months. The Greek crisis and the European Union bailout have pumped still more assets into the organization, which explains why gold – despite yesterday's profit-taking – have been given an extra boost over the last week.

However, the unclear outcome of the markets toward the EU bailout of Greece has improved the risk of a liquidity crisis just like we suffered during 2008, in which risk premiums go up sharply. Whereas gold can in general be expected to benefit from an increase in risk premiums, its price would fall back as it does during 2008 if there is a liquidity crisis caused by a major insolvency of a bank or country.

For the instant, therefore, gold has become a speculative game – instead of a secure store of price. Investors should not have greater than 15% to twenty% of their net worth in gold or gold-related assets, just in case everything goes incorrect.

Conversely, while there is a chance of a sudden "spike" in the cost of gold, the existing opportunity is probably one that shouldn't be missed. However knowing how volatile gold might be, its necessary to have an exit approach in place before buying gold. Or else, your paper can vaporize in a matter of time, or worse, turn into losses. For more information regarding how to trade gold with suitable downside protection, please ty www.GoldMarketMonitor.com

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Tags: gold futures, gross domestic product (GDP), investment in gold, U.S. Federal Reserve