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[By the dog days of summer in 2005, gold was getting ready to break out of its $400+ rut in advance of one of the most important developments in recent years for the yellow metal - the nomination of Ben  Bernanke as Fed Chairman in the fall. Originally appearing at the old blog on August 17th, 2005 when gold fetched $442 an ounce, this item looked at the inflation data at the time, that is, back when home prices were rising about 15-20 percent per year and gasoline only cost $2.50 per gallon - what some now think of as "the good 'ol days", when energy was still cheap and everyone was getting rich just by owning a house.]

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Inflation ticked up a bit yesterday with the Consumer Price Index showing a year over year increase of around 3%. Then inflation ticked up again this morning, with the Producer Price Index showing a year over year increase around 4%.

These numbers would probably tick up a bit more, probably a lot more, if they more accurately represented what most people experience in their lives. But, we know how that works. None other than Alan Greenspan once lamented that savings is confiscated through inflation (see the main page side-bar quote from 1967).

We prefer to think of inflation as a stealth tax. Really, is there any difference between people sending their money to the government and people keeping their money as it loses its purchasing power as a direct result of government fiscal and monetary policy?

The real trick is to make people think that the money they keep isn’t losing it’s purchasing power. Or, better yet, a more believable story would be that it is only losing its purchasing power at a rate of two or three percent a year. That trick, the trick of the confiscators, seems to have worked quite well for some time now.

Pay no attention to the budget deficits, soaring debt of all kinds, or the increasing difficulty in making ends meet, and repeat after me, “inflation is benign”, “longer-term inflation expectations remain well contained”, “the breakeven TIP spread shows no inflation impact from oil”, “the current cycle of non-inflationary prosperity can last for many years”.

Here’s yesterday’s Consumer Price Index summary:

Click to enlarge

Examining the right-most column we find that total year over year inflation clocks in at 3.2%. Despite the 0.5% monthly increase, the inflation beast is apparently still heeding its master.

[We resume our look back at some of the 2005-era posts at the old blog that discussed the barbarous relic, this item from July 29th, 2005 (when the gold price stood at $429 an ounce) detailing how Chinese leaders ought to swap in some of their pile of paper dollars for something more tangible. Recall that just a few years after this was published (i.e., after the events of 2008), emerging market central banks turned into big buyers of the yellow metal, China announcing in 2009 that it had been buying throughout the decade and officially doubling its reserves to over 1,000 tonnes. Many believe the Chinese have been even bigger buyers in recent years (wouldn't you if you had something like $3 trillion of dollar denominated assets) and that someday they'll tell the rest of the world how much they've bought.]

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Well, well, well …

Someone in the mainstream financial media has finally stumbled across the obvious answer to the question of how China can avoid duplicating some of the mistakes that Japan made with their bulging U.S. dollar reserves back in the late 1980s. Over at Forbes.com we find this illuminating article by Richard Lehmann about the possibility of China acquiring gold bullion with some portion of those U.S. dollars that keep piling up in their central bank.

It seems that instead of being enamored with U.S. entertainment and recreation businesses as the Japanese were (e.g., Rockefeller Center and Pebble Beach), the Chinese are much more practical. (Maybe this practicality has something to do with the unusually high number of engineers, and unusually low number of lawyers, in the Chinese government – not sure where we heard this, but we believe it to be true. It seems to make sense. If it’s not true, then it was fun believing it for a while.)

Having recently grown a bit tired of purchasing U.S. Treasuries month after month, the Chinese now seem more inclined to spend those U.S. dollars on mining companies, oil companies, and other natural resource companies to help ensure the steady flow of raw materials needed for their manufacturing juggernaut.

The latest issue of the Iacono Research Weekend Update has been posted to the website and is now available for subscribers here. There were no changes to the model portfolio or the buy ratings this week and the executive summary is as follows:

Amid rising concern that the European sovereign debt crisis will spin out of control due to instability in Greece and fear that this will spread to the rest of the world, risk assets had another bad week as both stocks and commodities tumbled while safe haven assets such as U.S. Treasuries and the U.S. dollar rose.

Commodity prices fell for the seventh time in the last eight weeks as precious metals led the way lower, related stocks seeing even bigger losses. For the week, the model portfolio fell 3.7 percent and is now down 1.0 percent for the year.