Inflation, Other Forces Will Continue to Push Gold Higher

Inflation, Other Forces Will Continue to Push Gold Higher

As Forbes contributor Frank Holmes points out, two weeks ago, the greenback hit its highest level in about a year. It beat a basket of other currencies in doing so, and once again showed strength against expectations. But was it a show of strength on the U.S. dollar’s part, or a show of weakness on the part of foreign currencies?

We’ve mentioned in the past that gold has been hitting all-time highs in currencies around the world heading up to 2019. Only when it comes to the greenback has its rise been slow, last year notwithstanding. And sure enough, checking the gold market’s price action in dollar denominations shows a familiar correlation: dollar up, gold down.

Dollar’s effect on gold’s price

Yet simple logic demonstrates that gold has little to worry about regarding dollar strength. With trillions of U.S. dollars printed last year, it’s questionable where that strength is coming from and how long it can persist.

Interestingly, despite the dollar’s relative strength recently, oil’s price has skyrocketed over the last few months. Americans notice at the gas pump when filling their tanks. However, oil price has much more far-reaching consequences than an extra $20 spent at the convenience store. Higher oil prices mean higher transportation prices, driving up costs of everything from fresh foods to imported manufactured goods.

Which leads us directly into the highest inflation in the last 30 years…

The Fed is losing control of inflation

The Federal Reserve has done nothing but downplay the threat of inflation so far. The PCE index, which monitors the prices of goods and services purchased by U.S. consumers, rose by 4.3% year-on-year in August. It was the ninth straight month of massively surging inflation, and the highest figure in the last 30 years.

It just so happens that the PCE index is the Fed’s preferred measure of inflation, which might explain why Fed Chair Jerome Powell voiced expectations of ongoing market disruptions, which are intrinsically tied to inflation, well into next year. Quite a statement for someone promising to embark on a major tightening program next month.

As just one example of the kind of damage that inflation is doing, home prices, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose 19.7% in the year ended July 2021. Hearing that it’s the highest annual rise since 1987 is troubling. Learning that the index started in 1987 really puts this number into perspective.

The dollar’s role in determining gold’s price

One of the key points of Trump’s presidential tenure was an ongoing back-and-forth with the Federal Reserve over various things, with the greenback being near the top of the list. President Trump wanted a weaker dollar for trade purposes, often saying that China’s devaluation of the yuan is continuing to give the nation a trade advantage.

Holmes notes that while a strong dollar might sound good on paper, it’s actually harming U.S. exporters, and it’s doing so during a time when no nation can afford to have economic weakness.

How this plays out remains to be seen. And while we wait for gold to truly respond to any of these tailwinds, it’s good to remind ourselves just how liquid of an asset gold is during a time when cryptocurrencies are taking their place on the global market.

While Holmes often tells people that gold is the fourth most liquid asset, the latest World Gold Council data shows that it’s actually the second, coming only behind S&P 500 stocks. Its daily trading volume beats all commodities, government and corporate debt and even currency swaps. Even amid bouts of tepid price action, the gold market itself is as action-packed as they come.

Buying Gold For “Portfolio Insurance” Could Be Lucrative

With all the parallels being drawn between the Vietnam war and the Afghanistan war, the tale of how gold plays into it is an interesting one. 1971 marked the full and official untethering of the U.S. dollar from gold and the beginning of a monetary experiment that works quite well until one looks under the hood.

But what really prompted President Nixon to make his infamous decision? As MoneyWeek’s Dominic Frisby notes, in August 1971, French president Pompidou sent his officials to New York to collect the nation’s expatriated gold, battleship and all. As the British informed Nixon that he should begin preparations, the President quickly realized that he can’t part with $3 billion of physical gold and finance a costly war with Vietnam. A concession had to be made, and between a sovereign and economic one, Nixon chose the latter.

The dollar was now untethered from gold, and the U.S. was free to print it and finance the war while eroding the greenback’s purchasing power to unimaginable levels. Perhaps most importantly, Frisby reminds us that Nixon portrayed the untethering as an extreme and temporary measure, one that would only be necessary until the war effort is over. This portrayal definitely served to cushion the impact of something that might otherwise seem unacceptable, just as in the case of quite a few other governmental interventions.

Now, 50 years later, we see that the government’s assurances don’t amount to much, and we’ve gleaned a few other things as well. Money is easy to print, but physical gold is hard to come by. Frisby notes that some gold investors might be disappointed by gold’s 15% drop from its high of $2,070. But that only really refers to spot price. An ounce of paper gold might go for its spot price, but those wanting to buy gold bullion might quickly find that the price has hardly changed since last August.

Gold owners and long-time bugs should also view gold’s lack of performance compared to stocks and other asset classes as a positive development. Wall Street instructs investors to hold 10% of their portfolio in gold and hope that it doesn’t go up. That’s because gold going up significantly means economic disaster as an optimistic scenario and a global crisis as a less pleasant one.

Yet gold is indeed going up. Over the last few weeks, it fell to $1,750 only to promptly climb back to its current level of above $1,815. Investors aren’t selling, which tells us that the outlook isn’t that great. Inflation is already here, and that it will only be temporary is yet another governmental assurance that could very well rank with the aforementioned ones. All of the drivers are in place for gold to continue its move up, and that’s not counting any black swan event during a time when everyone seems to be preparing for them.

Frisby sees room for gold to jump between 30% and 40% if trouble arises. In the meantime, gold investors should hold onto their well-performing insurance and hope that the next bout of gains comes from something mild such as a stock market crash, instead of global upheaval.

This Billionaire Says 25% of Your Money Should Be in Gold

This Billionaire Says 25 Percent of Your Money Should Be in Gold

Lately, there has been a lot of talk about a reassessment of portfolio theory and treating gold as a necessity, rather than an option. This came primarily as a result of the global bond market suffering a quiet collapse, with yields on most sovereign bonds falling to zero or dipping in negative territory. (Yields look even worse when you factor inflation into your calculations.) The Treasury, too, has been subject to the fall of the bond market with its ongoing all-time low showings.

Portfolio managers are indeed beginning to view gold as an alternative to bonds and accepting it as a necessary diversification. Even so, most investors remain underweight.

Prominent pundits like Frank Holmes, CEO of U.S. Global Investors, recommend a 10% allocation to gold to all investors. Many who aren’t keen on precious metals still view it as too high, despite what history has shown us.

Now there’s a voice saying that Holmes’s 10% gold allocation just isn’t good enough.

10% gold allocation might not be enough

Egyptian billionaire Naguib Sawiris finds this allocation all too low. In 2018, Sawiris revealed that he had allocated 50% of his $5.7 billion net worth into gold, along with a group called the Shareholders’ Gold Council. Sawiris has since lowered his gold allocation, perhaps to gather capital to start his recently-launched $1.4 billion gold mining fund.

Still, as he recently told CNBC, he recommends that all investors should keep their gold allocation between 20% and 30% of their total savings.

Here’s why Sawiris thinks more gold is better

Sawiris, like all gold investors, wants the safety that no other asset can provide. Last year’s pandemic has shown the extent, magnitude and quickness with which a crisis can hit, and it is one we are still very much in. In his interview with CNBC, Sawiris also spoke about the situation in Afghanistan, which has all the markings of something that could destabilize the entire Middle East.

While these particular comments weren’t tied to gold, there are already comparisons drawn between the Vietnam war and the Afghanistan war. It’s the kind of geopolitical turmoil that affects everyone involved and can cause severe disruptions, and precisely the kind of scenario that highlights the value of gold’s independence. After all, those Vietnamese refugees who held onto their physical precious metals found themselves on the most solid footing after fleeing.

Sawiris reiterated as much, saying that gold is something that has always been around and can be counted on to remain valuable. For the Western investor, gold is a safe haven providing peace of mind without worrying about stock, bond or fiat crashes or a crisis of any sorts. The greater the allocation, the lesser the worry, and the less dramatic the financial fallout when trouble arrives.

Sawiris said that he very much appreciates this safe-haven aspect of owning physical gold. In addition to the ongoing economic issues previously mentioned, he said today’s stock market might be worth keeping an eye on. Stock prices continue to barrel on despite record valuations in what is now by far the most decrepit bull run in history.

Gold Bullion and Coin Demand Just Keeps Rising: World Gold Council

Gold Bullion and Coin Demand Just Keeps Rising: World Gold Council
Photo by Zlaťáky.cz

As seen in the World Gold Council’s Gold Demand Trends report for 2021’s second quarter, gold managed to shed its losses from the first quarter and post an overall 4% price gain in Q2. Certain hawkish statements made by the Federal Reserve weren’t enough to balance inflation concerns, a weaker dollar and negative real interest rates.

Gold demand just keeps growing

Gold demand intensified on all fronts, including a somewhat surprising return by funds after their massive outflows in the first quarter. While the report states that there is still room for improvement in terms of jewelry demand, consumer purchases have nonetheless posted a considerable recovery, especially as economic conditions remain sluggish in many areas of the world.

Overall, jewelry demand in Q2 totaled 390.7 tons, a 60% year-on-year increase. The biggest buyer was China, whose 146.9 tons amounted to a 62% year-on-year increase. Chinese consumers purchased 338 tons of gold in the first six months of 2021, a 122% year-on-year increase. Remarkably, the figure is also 6% higher than the amount of jewelry purchased in the country in first half of 2019. Despite economic woes, India posted a 25% year-on-year increase in jewelry purchases, with similar rises happening across most of the Middle East.

Western jewelers also had a notable showing, with 37.7 tons of jewelry demand in Q2 2021 marking the strongest showing for the quarter since 2007. Investment demand in the U.S. was another important point, with retail investors buying 30 tons in the second quarter. The amount of gold bought in the first half of 2021 was brought to a record 61.7 tons. Chinese retailers and individual investors made the most of lower premiums and a stronger economy, buying 57.3 tons of gold in Q2. This represented a 41% year-on-year increase and a 16% increase over the second quarter of 2019.

Worldwide demand for gold bars saw an 18% year-on-year increase, while gold coin demand rose by 7% compared to the same quarter last year. And not all of the buyers were private investors.

Central bank gold buying significantly higher

Central banks posted their third consecutive quarter of net buying despite many instances of nations resorting to selling. Demand from the official sector was all the more notable due to the diversity of buyers, with Thailand purchasing 90.2 tons of gold in the first half of the year. It was joined by many other relative newcomers, such as Hungary which bought 62.09 tons of gold during the same period and Uzbekistan with purchases amounting to 25.50 tons.

The overall 214% year-on-year increase in central bank purchases was conspicuous, but perhaps expected given the conditions of last year.

Industrial demand for gold rising, too

Despite disruptions in the technological sector, gold demand was still strong across the board, with an overall 18% year-on-year increase of 80 tons bought during the second quarter. Electronics demand rose the most, 16%, while dentistry recorded its first year-on-year increase in 17 years with 12%.

Other industrial demand rose from 8.3 tons in Q1 to 10.8 tons in Q2, a 31% year-on-year increase.

Gold Rises on Inflation, Exhaustion of Stock Market Optimism, and This

Gold Rises on Exhaustion of Stock Market Optimism, Fears of Inflation, and This
Photo by Sabrinna Ringquist

Sentiment from both Wall Street and Main Street has gotten progressively more bullish on gold over the past few weeks, and with good reason. Gold has now posted its third straight week of gains and appears to be looking for another resistance level to breach.

The metal’s move past, and stay above, the important $1,800 level has been in focus for many. Friday’s trading session had it inching towards $1,830 before closing the day above $1,810 in yet another example of bullish action that has been on full display for nearly a month.

Gold may drop before it launches much higher: Newton Advisors

Newton Advisors’ founder Mark Newton says that, from a broader standpoint, gold’s price could experience another significant dip below $1,750 that would let investors get in on the action. Newton told CNBC that this is because June and July are traditionally the weakest months for gold in a year, making the latest run all the more impressive.

Regardless of whether gold experiences such a pullback, Newton says $1,855 is the next level to watch out for and that breaking it will most likely have gold pushing towards new highs. The gains over the past weeks came in good part over doubts that the global economy will recover as some optimistic forecasts are claiming.

Inflation is only the second most-important issue: Mobius Capital Partners

It can also be interpreted as an exhaustion of optimism in the more risk-on markets, a stance that was very much prominent heading up to June. Seasoned investor and co-founder of Mobius Capital Partners Mark Mobius believes that the narrow focus on inflation has actually sidelined a much bigger problem.

As investors and people worry about prices of goods and services rising, many of them forget that the true cause of this is currency devaluation, said Mobius in a recent interview. Mobius is one of a number of prominent experts who doubt in the accuracy or even altogether relevancy of the CPI as an inflation gauge.

While the CPI rose this year at its fastest pace since 2008, Mobius says that it leaves too many factors out and that prices are actually rising much more rapidly. The spike in prices, says Mobius, is the result of a currency losing its value, as has unfortunately been the case throughout history. This is why companies treat any spike in inflation as currency debasement, and why gold is likely to come into prominence as a store of wealth over the coming months.

Mobius’ comments over currency devaluation come during a time when the U.S. dollar faces some of the biggest threats to its status in a long time, partly due to money printing and balance sheet expansion and partly due to a broader loss of faith in fiat. In general, Mobius expects gold to continue moving up along with inflation, especially since central banks are actively targeting it instead of attempting to deflate their currencies as part of standard policy.

Wall Street, Main Street Bullish on Gold

Wall Street sentiment regarding gold’s price trajectory is shifting to the upside in considerable fashion, joining the already-optimistic Main Street traders. The Kitco gold price survey from last week showed 69.2% of Wall Street analysts surveyed expecting prices to move higher this week. No bearish votes were cast, with the remaining 30.8% predicted a neutral or sideways-only price movement.

Main Street was a bit more evenly spread, though still heavily favoring the upside. Nearly half of retail investors surveyed (49.6%) forecast higher prices this week, while 25.8% were bearish and 24.6% were neutral.

Despite little price action last week, analysts generally agree that a move to the $1,750 support level will be met with a strong correction, while a breach of the $1,800 level will continue to establish new highs for the metal.

Specific analyst commentary on gold in the short term

Marc Chandler, managing director at Global Forex, views a scenario where gold touches $1,750 before bouncing to the $1,800-1,815 range this week as the likeliest.

Kitco’s senior analyst Jim Wyckoff also finds the range important, noting that a move above $1,800 would set the trend for prices to go higher.

RJO Futures senior commodities broker Daniel Pavilonis is especially focused on a close above the $1,820 level. If it happens, Pavilonis thinks the market could be in for some explosive price action. Besides gold finding consistent support above the 200-day moving average, Pavilonis also said that the latest bout of strength in the U.S. dollar appears to be exhausting.

Colin Cieszynski, chief market strategist at SIA Wealth Management, is also notably bullish on gold. Cieszynski pointed to strong technicals as a reason to believe that gold might be getting ready to break out from the aforementioned range and continue moving up.

How is recent news affecting gold?

In general, the lack of any notable rise in gold price has been attributed to mixed signals from the Federal Reserve and corresponding data. The dollar continues to hold ground amid both peak inflationary expectations and rising inflation across the board. The latest data reports were likewise a mixed bag, with better-than-expected U.S. non-farm payrolls being met with a rise in unemployment.

The data still fell short of optimistic forecasts, however, and both Treasury yields and the greenback fell after the report. Analysts also noted that a lower trading volume on Monday due to the 4th of July holiday in the U.S. could result in some additional delays before gold finds a spot above $1,800.

Short-term vs. long-term views

Although analysts do enjoy attempts to predict the future, if you don’t work in the financial news industry, you’re probably better off keeping your eye on the horizon. When you look at gold’s performance over time, that’s when it really begins to shine.

In Russia’s Sovereign Wealth Fund, the Dollar’s Out and Gold Is In

In Russia's Sovereign Wealth Fund, the Dollar's Out and Gold Is In

The tale of Russian gold purchases has taken yet another interesting turn that might, at first glance, be difficult to decipher. After spearheading central bank gold purchases year after year in an almost boastful fashion, as if to remind Western interests that sanctions imposed on the nation can only accomplish so much, it ceased all purchases last March.

Its central bank gave a vague statement and has made no official purchases since then, only making two small sales. It was quite the shift from purchasing gold bullion in double-digit tonnage every month, but nonetheless left the country with the fifth-largest sovereign gold stockpile in the world, amounting to 2292 tons.

Russia’s National Wealth Fund

When people talk of sovereign gold stockpiles, they almost invariably refer to the amount of gold owned directly by a national central bank. Yet just as Russia so often blurs the line between public and private business, it appears that the same effect is happening with its national fund allocation. The $185 billion National Wealth Fund (NWF) is the latest edition of Russia’s state wealth fund. It has changed names since its introduction in 2004, but its focus was always on having a diverse portfolio that would protect Russia’s state budget against oil price fluctuations and secure the nation’s pension fund.

In December 2019, Russia’s Finance Minister Anton Siluanov made a statement that the fund should invest in gold due to the metal’s reliability. In November, the Russian government came up with a proposition that would allow the NWF to buy and store gold, and on May 21, an official announcement was made that the fund was greenlighted to do just that. The gold, unsurprisingly, will be stored with Russia’s central bank.

Where does the money come from?

The NWF is similar to the sovereign wealth funds owned by many nations who enjoy budget surpluses. Norway, China, and Abu Dhabi currently place in the top 3 for fund balances. The concept is simple: money in a sovereign wealth fund gets invested like a pension or an endowment, with profits accruing to the fund (and, by extension, the nation).

Like Norway’s and Abu Dhabi’s funds, the Russian sovereign wealth fund takes its seed capital from the nation’s oil industry. Any Russian oil revenue that isn’t allocated to the federal budget goes to the NWF, and the NWF spends it on a wide variety of assets.

Perhaps the worthiest of mention here are foreign exchange and foreign debt securities, which will likely lessen in favor of gold and precious metals over the following months and years.

Last year, gold officially become a bigger component of Russian reserve assets than U.S.-dollar denominated assets. It has since continued to de-dollarize amid risks of sanctions from both the U.S. and the European Union.

Gold’s popularity as an asset

Various nations that have purchased gold officially over the past few years cited the metal’s utility as a tool for sovereign influence and a universally-accepted store of value, despite having no immediate threat of sanctions unlike Russia.

In short, the new legislation means Russia can continue hoarding gold and dumping dollars under the guise of sound portfolio management. While the NWF issues supposedly accurate allocation reports, the same can’t be said of the State Fund of Precious Metals and Precious Stones, another government branch that does not publish reports on its gold reserves. As sovereign nations open up about the importance of owning gold to maintain clout on the global stage, Russia now has three different investment vehicles through which it can increase its bullion stockpile and lessen dependence on foreign assets.

Gold’s Heading Up for Many Reasons. Here’s the Weirdest One

Gold's Heading Up for Many Reasons. Here's the Weirdest One

After months of sideways price action, gold appears to have resumed its uptrend, breaking out of its range and hitting a high just short of $1,890 during Friday’s trading session. With upwards momentum looking strong and the 200-day moving average passed, some are wondering what caused gold’s breakout after a fairly tepid few months. This time, the usual suspects are joined by an unusual trend that just might be the primary cause…

Inflation and dollar weakness

According to the World Gold Council, the price rise is the result of inflationary concerns, with the CPI jumping by 4.2% year-on-year in April. Commodity prices are soaring, which drives up the producer price index and increases consumer costs on virtually everything from food to homes.

In addition, the trillions of newly-printed dollars are still a primary concern for most investors. Thanks to three rounds of free money, spending has recovered so a lot of those dollars are chasing a limited quantity of goods, driving prices higher. with inflation already materializing on one front and warnings of a lot of more to come on another.

JPMorgan reports big institutional investors dumping “digital gold” for the real thing

Some experts view the recent cryptocurrency “correction” (which seems like too subtle a word to describe a 7-day 40% plunge) as the real reason behind gold’s recent price gains. Bitcoin was praised as an inflationary hedge due to its fixed supply and, in fact, was invented primarily as a counterweight to central bank malpractice after the 2008 financial crisis.

But the recent double-digit percentage correction in the market reminded investors looking for a hedge that the crypto market is, and has always been, a highly volatile one.

While bitcoin provides hedging utility, its price volatility absolutely boggles the mind. This is where gold emerges as a familiar, reliable and most of all stable asset, as an overnight double-digit percentage pullback would be virtually unheard of in the well-established market. That’s probably why JP Morgan’s report of big institutional investors choosing stable hedging with gold over volatile hedging with bitcoin.

That might be a partial explanation of our unusual fund flow report…

Paper gold funds bucking the price trend

As seen on Chief Investment Officer, Tom McClellan offers a curious take that even the keen analyst might have overlooked.

McClellan notes that spikes in gold prices are usually followed by massive inflows into large gold funds. It’s the same pattern you see in stocks: once a stock has proven it’s a winner by going up, everyone wants a piece of the success, so they buy. It’s a human reaction. It’s the closest thing to a law of investing there is.

This time is different. Despite a major upward move in gold’s price, two of the biggest gold funds (SPDR Gold Shares, GLD and iShares Gold Trust, IAU) have not gained buyers. They have not seen the kind of cash inflow that always seems inevitable when prices go up. What’s going on?

McClellan interprets this as investors still not having woken up to the goings-on in the gold market, perhaps due to the hectic economic situation affecting all other markets. This could also be seen as investors uncharacteristically holding out for further developments before making a move, which doesn’t sound bullish on its own.

McClellan explained the potential benefits of the situation this way:

The uptrend is not mature yet. It still has more to go, before we get to the point when everyone starts piling in.

“Piling in” in this case means buying paper gold, which drives up gold’s spot price, which in turn tends to attract paper gold buyers… Basically the kind of feeding frenzy that has the potential to send prices skyrocketing.

Given that gold has already broken out to the cusp of $1,900, the kind of acknowledgment and subsequent piling into funds that McClellan hints to would quickly translate to fireworks in the gold market.

If McClellan’s idea that gold’s uptrend has just started gaining traction towards $1,900, on the way to its previous all-time high, the smart investors who hold gold have plenty to be excited about.

Big Gold Purchases By Central Banks: Bad News for U.S. Dollar?

Central Banks Buying Gold - Bad News for U.S. Dollar?

According to data published by the World Gold Council, global central banks haven begun adding to their gold stockpiles. In February, the following nations added to their reserves:

  • India (11.2 tons)
  • Uzbekistan (7.2t)
  • Kazakhstan (1.6t)
  • Colombia (0.5t) 

The only notable sale of central bank gold reserves was from Turkey at 11.7 tons.

Why did Turkey’s central bank sell gold?

Nations hold gold reserves as a sort of collateral against their sovereign currency. Turkey’s currency, the lira, had a horrible day on March 22 and lost 20% of its value. In response, Turkish President Recep Tayyip Erdogan made an appeal:

I ask my citizens to invest their foreign currencies and gold in various financial institutions and bring [those assets] into the economy and production.

via BalkanInsight

Put simply: if his people listened to Erdogan’s plea and swapped all their U.S. dollars and euros and precious metals for lira, demand for lira would increase. And therefore prices would increase. It’s reasonable to assume the Turkish central bank sold gold in order to buy lira in an effort to prop up the beleaguered currency.

Note that even after this sale, Turkey has a respectable 716 tons of gold reserves.

What other central banks are buying gold?

More recently, central bank gold purchases have been in the news.

This month, Hungary announced its intention to triple its gold reserves “to help stabilise the economy amid the COVID-19 pandemic, inflation risks and rising debt.”

Back in March, Poland decided to buy 100 tons of gold.

The Reuters article even hints at a possible explanation…

Over the last decade central banks, particularly in Eastern Europe, the Middle East and Asia, have stepped up purchases of gold, often seeing it as a way to reduce reliance on assets such as the U.S. dollar.

Reuters

Is central bank gold buying a bad sign for the dollar?

Not necessarily. Most central banks around the world hold a combination of foreign exchange reserves (a collection of the world’s most-used and/or most-stable currencies) in bonds as well as gold or other precious metals.

So, in a sense, any government that issues bonds is competing for central bank customers. For the most part, only the most common currencies are considered useful as foreign exchange reserves. According to the IMF, the top five are:

  • U.S. dollar
  • euro
  • China’s renminbi
  • Japan’s yen
  • U.K.’s pounds sterling

So anytime the U.S. Federal Reserve, the Bundesbank or the Bank of England issues a bond (a promise to pay later for cash now, or an IOU), there are other global central banks who are potential customers. Along with them, what you might think of as the “traditional” customers for bonds like pension funds, insurance companies, individual savers, etc. also want bonds. More customers means more demand, and more demand means higher prices.

But what if some of that central bank demand is diverted out of bonds, into gold?

That means a diminished demand for bonds. That means a slight upward pressure on the interest rate issuing banks must offer to attract buyers. Which makes deficit spending more expensive. Sovereign bonds can also lose value to inflation.

Further, as mentioned in the Reuters article, gold isn’t subject to counterparty risk. There’s always the chance, however small, that a nation might choose to stop paying its bond-holders. (This is called a default, or a sovereign debt crisis, and they happen fairly regularly.)

There’s zero chance of physical gold defaulting. Once those gold bars are locked up in a nation’s central bank vaults, it serves as a permanent store of value.

In an important sense, when a central bank chooses to add to their gold reserves, the decision says, “We’re diversifying our country’s savings out of currencies we don’t control, into an asset class that we can trust.”

A Stagflation Flashback Ahead? Keep an Eye on Gold

Stagflation flashback ahead? Keep an eye on gold

Ever since gold’s correction from August’s high, market participants have been watching closely as to whether we will bear witness to a similar scenario to the one between 1971 and 1980. Back then, economic conditions eerily mimicked what seems to be on the horizon today: a stagflation environment propelled by low growth, rising prices and excessive interest rates.

That bout of stagflation came, most would agree, as the result of the U.S. dollar being untethered from gold. The metal subsequently jumped from its $35 tether valuation to $200, corrected to $100 and then soared far above to reach $850 within a few years’ time. What might we guess, based on this historic pattern?

Today there’s no tether-based gold valuation. Recent calls for a return to a gold standard or a similar tangible backing of the dollar from various corners have very much driven that point across.

The Federal Reserve maintains inflation is running well below its stated annual target of “around 2% on average,” and that they know this because their measurements are accurate. We are forced to wonder how that’s possible, given the historic amount of money printing. Even such a luminary as former U.S. Treasury Secretary Lawrence Summers fears the nation could be facing its biggest inflationary problem in 40 years.

Wealth preservation and inflation concerns

Reports from various government mints show that precious metals purchases have maintained their record-shattering pace over the past few months ‑ regardless of fluctuations in price. In other words, buyers seem very much concerned about long-term wealth preservation and aren’t deterred by momentary corrections.

And it appears they have every right to be.

With the debt bubble ballooning and government deficit perpetually increasing, many wonder how and when the Fed will choose to address these issues. In the absence of a debt default (which is viewed as highly unlikely), the remaining options boil down to spending cuts, tax increases or allowing inflation to run its course.

Spending cuts mean austerity, less services for taxpayers, less money for special interests. That’s simply not a politically tenable path.

Tax increases could raise funds for federal coffers. On the other hand, taxing the wealthy all too often results in nothing more than emigration to more wealth-friendly nations. To raise taxes on a thing is to risk driving it away.

That leaves us with inflation, which seems to be the Fed’s favored option. And it is almost certainly already underway.

Inflation destroys debts

The Fed’s comments indicate the official sector has braced for a public response over claims they wouldn’t oppose inflation running past the desired target. Given how the Fed measures inflation, it seems citizens are especially vulnerable to being caught by it off-guard in the form of a sudden spike in consumer prices.

On this topic, Indonesia’s 30% increase in tofu prices since December, Russia’s 60% rise in sugar prices over the last year and a 20% spike in grain prices are worrying examples of how consumer goods can shoot up both suddenly and unevenly.

The market response to a high-inflation environment is fairly well laid-out. An initial boost of the stock and real estate sectors is followed by erosion of purchasing power, together with excessive monetary demand, a loss of confidence in fiat currencies and an ongoing increase in money printing.

Look familiar? Initial boost in stock and real estate? Check. Erosion of purchasing power? See food inflation data above (or recent stories about manufacturing concerns over steel or lumber prices). Excessive monetary demand? Yes in capitals; businesses are issuing new debt at a record page. Might the boom in bitcoin and other digital currencies have something to do with the loss of confidence in money backed by nothing but faith? Increased money printing: yes, again at record levels.

What does the future hold?

It should come as no surprise that the public have flocked to precious metals, with the latest social-media driven rush to silver being perhaps the first of many warnings.

When inflation does hit in such a way that not even distorted CPI can disguise it, the small subset of the public who have invested in gold and silver have managed to preserve the majority of their wealth. The rest scrambled to secure any sort of hard asset with their rapidly-depreciating currency.