In our post on January 28, 2021 “Gold, The Tried-and-True Inflation Hedge for What’s Coming!” we outlined four reasons that we expect higher inflation over the next several years. The brief bullet points are:
- Money Supplies have risen dramatically
- Commodity Prices are rising again
- Reduced Globalization as ‘Made at Home’ policies are proliferating
- Pent up demand
Headlines such as this one last week from Bloomberg “Inflation gauge Hits Highest Since 1991 as Americans Spend More” or this one from the Financial Times, “Inflation fears in the UK rocket as supply and staff shortages stymie recovery“, or The Australian Financial Review, “Soaring gas prices add to the energy, inflation crisis“, are becoming regular headlines in the mainstream media.
Not to mention headlines about how inflation measures do not capture the full inflation felt by consumers such as this one from Canada’s Global News, “Consumer Matters: Is Canada underestimating food inflation rates? “
Inflation is NOT Transitory
And it seems that markets are finally catching up to the view that this inflation is not as ‘transitory’ as we have been told.
A Bloomberg article title “Four Charts Suggest Inflation May Not Be So Transitory After All” the first line of the article warns “Before buying central bank assurances that inflation is transitory, here are four charts from various corners of the market suggestion otherwise.” Before going on to say that businesses are upset about the skyrocketing costs of raw materials and that these businesses are feeling pressure to raise their prices.
The four inflation indicator charts are below:
So, here is the tricky part for Monetary Policy …
Central Banks are Trapped!
We are reminded by the U.S. Debt Ceiling debate that is consuming Congress and the White house the last several days that the U.S. government debt has been growing exponentially for the last 30 years …. And has more than doubled in the last 10-years to more than $28 trillion. More than $6 trillion above US GDP.
Even if inflation is here to stay, we are not going to see the Fed (or other advanced economies) central banks raise interest rates in the manner of the late 1970s.
Why? Because central banks are trapped, if they raise interest rates quickly this means that the interest payment on this debt goes up quickly and the governments must choose between making their debt payments, cutting other services or raising taxes.
Defaulting on the debt is not a good choice but remember that in this era voters don’t generally re-elect governments that cut services or raise taxes.
Also, not to mention that equity markets quiver every time the central banks mention raising rates, and a large equity market decline is not within the ‘intestinal fortitude’ of the current regime of central bank officials.
Moreover, on top of that, what about the rapidly rising housing prices and the large mortgages, at low interest rates that go along with the surging house prices. Think central bank officials are willing to have another housing crisis on their hands … Us neither!
So, what does the central bank do … they continue to talk up the transitory nature of the inflation in the economy and they hold the course with slight adjustments along the way.
As we wrote in the March 4 post titled “Central Banks Will Still Do “Whatever It Takes”! ” Central bank options are limited, and not only are their options limited but the preferred option is to allow governments to inflate their way out of debt – which bottom line is that more inflation leads to more nominal GDP (actual GDP + inflation)! (The March 4 post discusses the formula for reducing debt to GDP ratios in detail.)
It is not at Tsunami speeds and may not look like it yet, but the tide is turning and so will the ratios of silver to equity markets as inflation takes hold and central banks deal with their limited options!
Moreover, in the coming economic environment silver surpassing its all time high is being carried with the incoming tide. Gold will also rise with the tide and as it usually rallies first silver is the one to watch as although it lags at the beginning during bull rallies it historically usually outperforms gold.
Such as in June 2020 when gold rallied a significant 20% in two months silver caught the wave and moved more than 65%.
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Market Update: We remain in unchartered territory.
The world is still trying to exit a global pandemic, while high inflation and political discord persist.
This and more are some of the factors that could impact economies and markets in the final quarter of 2021.
Treasury yields have spiked, mostly due to central banks announcing they may begin to ease monetary policies.
Both the 10-year and 30-year saw their largest quarterly gain since March, and the two-year logged the largest three-quarter gain since 2018.
No agreement has been reached on the debt ceiling. U.S. debt is now closing in on $29 trillion!
Roughly $700 billion has been incurred since President Biden took office and chose Yellen to head the Treasury, and the budget deficit through the first 10 months of the fiscal year stood at a whopping $2.71 trillion.
GOLD PRICES (USD, GBP & EUR – AM/ PM LBMA Fix)
06-10-2021 1748.25 1759.70 1290.21 1297.780 1513.980 1525.130
05-10-2021 1758.00 1753.20 1290.90 1287.020 1515.750 1512.660
04-10-2021 1751.85 1754.55 1291.64 1287.490 1508.520 1508.740
01-10-2021 1755.60 1757.05 1300.72 1295.470 1515.610 1515.100
30-09-2021 1730.95 1742.80 1286.96 1293.330 1492.250 1505.080
29-09-2021 1741.65 1737.15 1288.65 1290.880 1493.120 1492.390
28-09-2021 1739.65 1733.75 1273.25 1280.550 1489.840 1484.440
27-09-2021 1749.15 1755.30 1277.750 1279.610 1495.350 1500.08
24-09-2021 1755.15 1746.80 1280.560 1275.860 1495.740 1491.24
23-09-2021 1771.05 1750.00 1295.880 1274.180 1510.000 1490.65
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