One huge gold myth busted!

Make no mistake; hyperinflation is not just around the corner. The well-peddled myth that America’s program of quantitative easing, a tool to inject billions of dollars into the US economy, is destined to result in soaring gold prices should be firmly put to rest.

As much as gold miners like Newcrest Mining (ASX: NCM), Kingsgate Consolidated (ASX: KCN) and Silver Lake Resources (ASX: SLR) would love to see investors scrambling to buy gold again, it is unlikely to be because of quantitative easing. Why is this?

Many people mistakenly think that the program of quantitative easing is about printing money, when really it is a tool to lower interest rates and encourage more borrowing and investment to kick-start the economy.

The US does not, in fact, have its money printing presses cranked to full throttle, churning out billions of dollars every month. The process, which is explained quite well in this Time magazine article, actually involves the US Federal Reserve making more money available to banks at lower interest rates by buying bonds.

This is why US inflation, measured by changes in the country’s consumer price index (CPI), has been just over 1% this year despite no slowing of the government’s bond-buying program. For gold investors this means it is unlikely that inflation alone will cause a flood of demand from people who want to protect themselves from the ravages of inflation and on their savings.

What is more likely to cause the price of gold to rise going forward is the global cut back in production by the world’s gold producers, which occurred as the price of gold flopped earlier in the year.

This reduction in output combined with increasing demand from growing economies China and India are much more likely to have a real impact on prices over the next year.

Foolish takeaway

The low inflation seen by the US won’t necessarily continue, but those investors banking on rocketing hyperinflation to drag the price of gold higher may need to go back and re-check their investing game plan.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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