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Inflation Pressures Building

There has been considerable discussion in recent weeks about the prospect and threat of rising inflation. This inflationary scare comes at a time when the government is unleashing massive stimulus measures to bailout states, businesses, and consumers – all in the name of combatting the pandemic.

We’ve already seen a $1.9 trillion helicopter money drop this year, and the Biden administration appears just to be getting started.

The latest reading of government’s CPI (Consumer Price Index) continues to suggest that inflation so far remains low. Even if we do experience inflation, government officials continue to assure, it will be transitory. Despite these weak guarantees, financial establishment luminaries are starting to sound the alarm and Americans are becoming increasingly concerned about soaring inflation.

Former Treasury Secretary Lawrence Summers along with former IMF Chief Economist Olivier Blanchard recently voiced concerns over President Joe Biden’s $1.9 trillion stimulus plan, suggesting that so much new largess on top of all last year’s large stimulus packages could cause the economy to “overheat.”

Inflation is a tax on savers, wage earners, and those without sound money or hard assets, so while the exact definition of “overheat” remains under debate, it seems clear that a sudden rise in price pressures could cause the Fed to lift rates rapidly, potentially causing job losses and other issues as the economy slows.

Such a scenario could lead to a period of higher inflation, or even 1970s-style stagflation.

Considering more than 25% of all U.S. Dollars ever printed have been printed in the last year, would anyone be surprised?

The ongoing threat of inflation could lead to more buying of gold and other hard assets. Fed chief Jerome Powell has suggested time and again that the central bank would be comfortable allowing inflation to run hot for a while before taking any action to calm price pressures.

This means that the central bankers will not hike interest rates or roll back bond purchases to slow things down. And when government-reported inflation rises well above 2% while interest rates remain at lower levels, the resulting negative real interest rates will underpin gold prices and could potentially lead to substantially more gold buying and higher prices.

The Win/Win Scenario

The gold market may very well have entered a win/win scenario.

The market has been buoyed by ultra-low interest rates, quantitative easing, and the threat of rising price pressures. Such conditions put the dollar under pressure, and gold’s proven record as a historical inflation hedge continues to create a tailwind for the metal’s market.

And even if the Fed ultimately hikes rates, if history is any guide, these monetary alchemists who believe they can create wealth by printing it will be behind the curve – and gold will still benefit from real interest rates that continue to be in negative territory.   

The gold market may, therefore, be headed for a further ascent regardless of what the Fed does or does not do in the years ahead.

Price action in the yellow metal has been to the downside since the all-time high achieved last August, although that downtrend may have now run its course.

In recent days, bargain hunters and long-term investors have stepped into the market, and gold may soon reverse decisively and make a new run at its all-time high of $2,060 an ounce.

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