HardAssetsInvestor

Written by Brad Zigler  |

November 30, 2009

Monetary Inflation Index Scores New High

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Last week was definitely a record-setter. Before Friday's Dubai World scare (see this week's feature, "Gold Makes A Near Clean Sweep"), gold prices broke into new high ground vs. the U.S. dollar, the euro, the Swiss franc and the pound sterling.

And, in the wake of the pre-weekend shock, our own Monetary Inflation Index soared past its previous high registered in July 2008.

HAI Monetary Inflation Index

Monetary inflation isn't measured by the Consumer Price Index. CPI reflects changes in the value of a basket of goods and services obtained domestically. Monetary inflation tracks the purchasing power of the dollar (higher inflation = less value) in global financial transactions where dollars are swapped for gold or a competing reserve currency, the euro. More often than not, monetary inflation precedes consumer price inflation.

The HAI Monetary Inflation Index, measured from a base of 100 set on Jan. 1, 1999, reached 193.31 Friday, more than three index points above its record last year. That translates to an average annual inflation rate of 6 percent for the decade (compared with the index level 365 days ago, monetary inflation's risen at a 4.5 percent pace).

Back in mid-July, when the index was at 151.88, we forecast the probabilities of an inflation spike ("Laying Odds On Inflation") and plotted potential targets for breakout moves.

From last summer's wedge formation, an index level of 234 seemed likely. As of Friday, we're halfway there.

So what's that mean? You can't trade monetary inflation directly, but you can look at one of its ingredients—gold—for a trading clue.

COMEX/NYMEX Gold (Dec. '09)

There's a halfway marker on the spot gold chart—so-called "measuring gaps" punctuating the July-November run-up based from $920. A $40 price "island" between $1,090 and $1,130 formed over a week and a half in early November before a runaway break to $1,140 began the current leg. Technically, all this points to an objective of $1,300, a price level consistent with gold's September breakout from a 16-month consolidation phase.

It took five months (July to November) for monetary inflation to reach its halfway point, but only three months (September-November) for gold to hit its putative midline. How long the "second half" will take is anybody's guess right now.