Gold pushed above $1,900 an ounce near the end of the trading day Tuesday (May 25) and closed just below that level. Silver also had a strong day, up about 22 cents, closing just below $28 an ounce. Meanwhile, the dollar index headed in the opposite direction, closing an 89.66. That’s the lowest level for the dollar index since early January. Peter Schiff talked about the rally in gold and how the inflation tax is destroying American’s purchasing power on a recent podcast.
There were a couple of catalysts that pushed gold up and created headwinds for the dollar.
First, Chicago Fed President Charles Evans said he fully supports continuing the central bank’s loose monetary policy.
I have not seen anything yet to persuade me to change my full support of our accommodative stance for monetary policy or our forward guidance about the path for policy.”
San Francisco Federal Reserve President Mary Daly made a similar statement.
“We’re talking about talking about tapering, and that is what you want out of us. You want to be long-viewed here. But I want to make sure that everyone knows it’s not about doing anything new. Right now, policy is in a very good place. Policy is supporting the American people.”
Evans also said the current rise in prices is “unlikely to lead to the kind of undesirably high inflation that some notable economists have warned about.”
Notice Evans used the word “unlikely.” He didn’t say it won’t lead to the undesirable kind of inflation.
That means he understands that there is a possibility that the kind of inflation that we are going to have is going to be the ‘highly undesirable’ kind. And the problem is the Fed has no way out of that. There is no cure for that disease. So, if we get the unlikely possibility that Evans still leaves the door open for, if we get that, well then what do we do? Well, then we’re completely screwed.”
Peter reiterated that he thinks the central bankers are wrong to think price inflation won’t become a big problem, just like they were wrong back in 2005 and 2006 when they insisted subprime mortgages weren’t a problem.
The Federal Reserve, both under Bernanke and Yellen, have a very bad track record of appreciating the problems that confront the economy. So, the fact that the Fed is today just as dismissive of the inflation risk as it was back then with respect to the risks from the mortgage crisis in subprime, I don’t know why anybody would take any comfort in the Fed’s position on inflation.”
Nevertheless, these comments impacted the markets because they undercut the expectation that the Fed will take action and tighten monetary policy soon to deal with hotter than expected inflation. And this expectation has been what’s kept gold from rallying even higher and the dollar from dipping lower.
Here now you have a Fed president coming out and saying, ‘Absolutely not. We’re not worried about inflation at all. We think all these economists who say inflation is going to be a problem are wrong. It’s transitory. And so we’re going to keep the monetary pedal to the metal. I fully support the current monetary policy and all the forward guidance.’”
That was the initial spark that got gold out of the red.
Some economic data that came out later in the day pushed the rally even further.
New home sales came in much lower than expected, falling about 6%.
This is again bearish for the dollar and bullish for gold because it shows a slowdown in new home sales, which shows a softening in the economy.”
A MarketWatch report noted that high prices are eroding new home sales. This reveals the impact of the price inflation the Fed keeps telling us isn’t a problem.
There was also a drop in consumer confidence. It was the first dip in the consumer confidence index in six months. The survey revealed that many Americans don’t expect to buy big-ticket items such as automobiles, homes, or appliances in the coming months. Why not?
Because the prices have skyrocketed. Real estate prices have soared. Automobile prices, used car prices have gone way up. And so people can’t afford it. And obviously, if you can’t afford to buy a new home, well, you’re not going to be buying the appliance to go in your new home. So, you now have rising prices destroying all of this demand.”
The government created all of this demand by handing out trillions in newly-printed money.
The problem is you can’t buy cars and houses that haven’t been built. The Federal Reserve prints money. They don’t print merchandise. They don’t print homes or appliances. Somebody’s got to manufacture those things. And it certainly isn’t Americans. Americans are sitting at home cashing their unemployment checks. When they want to take their unemployment checks to an automobile dealer, well, there’re no cars there. They weren’t making any cars and the rest of the world didn’t make enough cars to ship to the United States, so they’re not here. So, prices are going up. And so now, the rising prices are pricing Americans out of the market.”
Peter said rising prices aren’t confined to these big-ticket items. Everything we buy is going up in price. As a result, the same thing will happen on a smaller scale for all of that merchandise.
As prices go up, more and more Americans are just not going to buy the stuff because they can’t afford it.”
This will slow down any hint of an economic recovery.
So, what can the Fed do? Will it just print more money for the government to hand out?
Well, that’s not going to work. It’s like a dog trying to chase its tail. Because now they send everybody bigger checks so that they can pay higher prices and now the prices go even higher because now people have even more money to bid them up. The reality is printing money doesn’t create wealth. It doesn’t produce goods and services. It just produces money to bid up the prices for goods and services. And that’s exactly what’s happening. And this is how Americans are experiencing the inflation tax.”
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