China And The West: Opposite Approach To Inflation

Rosanne Lim
22 February 2011

Precious metals gained on Friday amid the G-20 weekend summit, geopolitical concerns, and inflationary pressures. Gold traded at $1390 per ounce while silver was at $32.65 per ounce. So far, February has been an interesting month for gold. The development in emerging markets, inflationary pressures in the United States and lingering geopolitical worries have all contributed to its rally.

Gold prices held steady as the People's Bank of China did what it can do combat inflationary pressures at home. The price of gold was almost unchanged after reports confirmed that the PBOC raised its reserve ratios to 50 points which will become effective on Feb. 24, 2011.

It should be noted that the gold prices were firm despite the fact that policymakers in China implemented a series of tactics, even interest rate hikes, to contain inflation and cool its overheating economy. Food prices in China are of particular concern because an average working class Chinese allocates a high proportion of their income to buy food.

Fed Keeps Its Cool amid Inflation Concerns

While Chinese policymakers are ramping up their fight against inflation, Fed Chairman Ben Bernanke doesn't seem to think that deviating from his current policy of quantitative easing and zero interest rate would be a good move at this time. Aside from buoying gold prices, it also helped maintain the price of almost all asset classes.

In the United States, precious metals are doing well because the Fed is keeping its commitment to keep monetary policies loose in spite of skyrocketing commodity prices. Silver performed better than gold this month, appreciating by 13%. Meanwhile, gold price only increased by 4% in February. At its current rate, silver is trading at its peak level since 1980 when the Hunt Brothers tried to dominate the market, pushing the price of silver to $50.

High inflation brings one of George Washington's statements to mind, "paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." Around a century afterwards, the effects of inflation are distinctly apparent. Today, a dollar is worth less than 2 cents in purchasing power than in 1913.......read on