Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 48th year in the gold business
“Sound money benefits not only the state but also…every class of people, whereas debased coinage is harmful. Although this is quite clear for many reasons, we learn that it is so also through experience, the teacher of objective truth.” – Nicolaus Copernicus, 1526
Inflation’s surprise spring offensive
Will the 2020s be a rerun of the 1970s?
“It’s always been right to be skeptical when someone says ‘this is the year that inflation comes back,’” says M&G Investments Jim Leaviss in a recent Financial Times Big Read. “But for the first time, you can say this time is different. The pandemic might be the systemic earthquake that changes the inflation outlook we have been used to for the past 30 years.” To be sure, the FT editorial followed on the heels of government data showing solid gains in wholesale and retail inflation. A week later the Commerce Department reported a much higher than expected increase in the Personal Consumption Expenditure index – the Fed’s favored inflation indicator.
“There is an entire generation of traders,” warns Franklin Templeton’s chief investment officer Sonal Desai in that same editorial, “who have grown up investing in the post-global financial crisis world of no inflation. People shouldn’t underestimate how uncertain things will look if we are entering a new paradigm.” As always, there is the issue of summertime and whether or not the world can be put on hold while thoughts turn to leisurely pursuits. Perhaps this year, as we come out of the pandemic lockdown, that need is more pressing than in most. At the same time, for the reasons just mentioned, this might also be a year to remain on alert. We could be in for more and even nastier inflationary surprises as the summer unfolds.
Will the 2020s be a rerun of the 1970s?
‘The conditions for gold could not be better’
Yale economist Stephen Roach sees Jerome Powell’s Federal Reserve as following along the same path it took during the stagflationary 1970s. “Memories can be tricky,” writes Roach in his essay posted recently at Project Syndicate, “I have long been haunted by the inflation of the 1970s. Fifty years ago, when I had just started my career as a professional economist at the Federal Reserve, I was witness to the birth of the Great Inflation as a Fed insider. That left me with the recurring nightmares of a financial post-traumatic stress disorder. The bad dreams are back. They center on the Fed’s legendary chairman at the time, Arthur F. Burns.” In particular, Roach reminds us that Burns “poured fuel on the [inflation] fire” by allowing real rates to go negative – a policy option the current Fed openly favors.
Similarly, Incrementum’s Ronald Stoferle and Mark Valek believe “it is quite possible that the 2010s will turn out to be the 1960s and the 2020s the 1970s. In our view, at any rate, the indications are clearly intensifying that the entire area of inflation-sensitive assets could be at the beginning of a pronounced bull market. As uncomfortable as the dynamics are in general, the conditions for gold could not be better: massively over-indebted economies that will resort to devaluing their currencies as a last resort to reduce their debts. We believe that real interest rates will remain in negative territory for the next decade.”
‘A broader perspective of big picture patterns and cycles’
Why private gold ownership makes sense in the fiat money era
This summer we will arrive at a significant milestone – the fiat money system’s golden anniversary. Ray Dalio, who many consider the most successful investor of the present era, has consistently advocated gold ownership for individual investors as a hedge against financial uncertainties, particularly those related to a further debasement of the fiat dollar. His Bridgewater Associates All Weather fund holds a 7.5% stake in gold.
“I believe,” he wrote recently in a LinkedIn article titled The Changing World Order, “that the reason people typically miss the big moments of evolution coming at them in life is that we each experience only tiny pieces of what’s happening. We are like ants preoccupied with our jobs of carrying crumbs in our minuscule lifetimes instead of having a broader perspective of the big-picture patterns and cycles, the important interrelated things driving them, and where we are within the cycles and what’s likely to transpire.”
The chart below speaks to Dalio’s “broader perspective of the big-picture patterns and cycles” – and perhaps the most important big-picture pattern of them all. It offers at a glance a bottom-line understanding of why gold continues to make sense as a long-term portfolio holding.
Gold Price / Monetary Eras
Chart courtesy of MacroTrends.net • • • Annotations by USAGOLD
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