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As many of you know, US President Richard Milhous Nixon once said that inflation more than 4% is dangerous to the economy. From the time after 2008, inflation has been greater than 5%. Despite this, no one has given any warning about this evil which has been festering in the economy.

Comparing with different periods of time, returns for gold adjusted for inflation showed better returns during higher inflation in the 1970s at 25.0% for its bullion and 19.9% for its stocks while that for the 1990s were -5.4% and -7.4%. Looking back, the CPI in the 1970s grew at 8.1% per year while that for the 1990s was 2.9% per year. With today's events shaping the world once again for higher inflation, it is thus very likely that gold investors can profit. Let us now look at why inflation will get higher as time pass.

For a very long period of time, inflation stayed low despite high liquidity, low interest rates, rising commodity prices and increased supply of US dollars. This is because cheap labor in developing countries like China helped offset increased production costs engendered by higher commodity prices. However, with the currencies of developing countries like the RMB appreciating against the US dollar, wages are bound to rise. Let us now see why it will happen.

To offset the increase in inflation, workers will demand for higher wages for the increased cost of living and this cycle will feed itself until something drastic happens to limit the rise in cost of living. As a result, wage-push inflation will very likely happen within the next decade as such tensions build up.

Also, as workers in developing nations get more educated, they will form unions to protect themselves. Under the pressure of workers and their unions, employers very likely have to give in, thus ushering in a new era of inflation when wages will keep rising. Nevertheless, governments cannot stop this because it has to win support from workers who are the basis of their economy.

To save themselves from political instability which many developing countries have, politicians will have to risk inflation. Under the effect of all these driving factors and increasing pressures from workers with suppressed wages, the increase in inflation will be sustained.

Hence, to hedge against inflation, there will likely be a gold rush and it is better if investors can get on the bandwagon to wealth earlier than others.

Moreover, the current increase in inflation is not yet full-fledged as it takes time for commodity prices to rise until a level that they can control the economy via % of GDP. Since the effects are still not completely felt, it is definitely wiser to buy commodities like gold now when they appear cheaper before a surge in prices. Currently, gold prices are around US$1,300/oz which is already very high. For now, it could be slightly late to buy but it is quite likely that gold prices can rise to higher levels in the future.

Here, in contrast, inflation will increase bond yields and reduce bond prices. This will make long-term bonds less profitable investments than gold. Although I think gold isn't the best investment today, it is definitely one of the better investments to touch for this decade.

Furthermore, the dollar is expected to depreciate significantly in the long run. This is because the Federal Reserve had doubled the amount of US dollars circulated to US$1700 billion after 2007 to bail out the economy. From 1913 to 2007, only US$825 billion was put to circulation. With such madness and drastic increase in US dollar circulation, it is very likely that inflation will occur as more money pursue the same amount of goods and services in the market.

To add on, in response to this, other nations will be forced to print more of their currencies to increase the price competitiveness of their exports against the US, leading to worldwide inflation. Consequently, there may even be a race where countries compete to devalue their currencies. If the US happens to devalue the dollar excessively, the US dollar will lose its value as the world's reserve currency, causing demand for US dollars to fall and increasing demand for assets like gold. Hence, it is possible that under such circumstances, gold prices will rise in the future.

In addition, the depreciation of the US dollar and other currencies can increase price of imports, causing imported inflation. To secure export earnings and cure trade deficits, countries could become more protectionist and even start trade wars in the worst case scenario. If that happens, production costs will increase as countries rather use their own exports to produce instead of cheaper alternatives offered by other countries. This will increase inflation, causing fear that will drive gold prices higher.

To conclude, I hope readers have gained valuable insights about the possibility of higher inflation in the future. Historically, gold prices will rise with inflation. Thus, I believe gold will be a good bet as the new era of inflation unfolds. Nevertheless, there will be setbacks for the gold investor which he must consider.

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