Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Buy the Commodity Boom, But Ignore Money Printing: SPDR Gold Trust (ETF) (GLD)

There are many reasons to buy into the commodity boom. The world’s population is increasing and even the UN is starting to question if this growth is sustainable. With a limited amount of arable land, constraints in agricultural inputs, concerning crop yields, and a growing demand for meat there are many factors pushing commodity prices higher.

It is common to hear that the printing of money by the government will push prices even higher, but this analysis has serious problems. Investors who don’t examine history risk making choices on weak evidence and needlessly complicating their decision making process.

Why Ignore the Money Printing?

In a credit based world, banks lend money to people and business. A mortgage for the construction of a new home is a great example. In older economic theories banks are presented as being constrained by the number of reserves they have. In these models the banks cannot lend until they have enough reserves in the bank to cover the new loans. In this thinking money printing by the government increases the number of reserves in the bank and thus causes inflation when the banks make new loans.

Empirical evidence tells a different story. The chart below shows how reserves have exploded and yet U.S. inflation has remained essentially the same. Major central banking officials and the Bank of English believe that banks are not constrained by reserves. America’s adventure with quantitative easing has not produced hyperinflation or the collapse that some predicted.

US Excess Reserves of Depository Institutions data by YCharts

What about Hyperinflation?

It is common to hear predictions of hyperinflation because of runaway government printing. It is easy to get someone to listen to you when they believe that all currencies will be worthless by tomorrow morning.

A look at hyperinflation over the past hundred years shows that it is commonly associated with regime change and substantial amounts of foreign denominated debt. Post World War I Weimar Germany and Zimbabwe had massive amounts of foreign denominated debt along with regime change. Argentina faced large foreign denominated debts during their recent bout of hyperinflation.

Where to Invest

Disregarding government printing, commodities have face strong upward pressures because of a growing world and slowing yield growth. PowerShares Agriculture Fund is based on a number of staple commodities. Currently live cattle, sugar #11, and soybeans have the biggest weightings between 13.4% and 12.9% of the fund. Other staples like cocoa, coffee “C”, and corn are similar with weightings between 11.9% and 10.6%.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.