The name of the game is inflation, and Yellen is in it to win it.
Bullion.Directory precious metals analysis 12 October, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics
The dollar was bid to multi-year highs. Everyone fell prey to the assumption that the Fed was ready to signal a hike in interest rates because the US economy is strong enough to throw the QE crutches away, right?
In typical fashion, the Fed disappointed (similar to what happened to the pound when the BoE nudged off rate hike expectations).
But market participants are underestimating the dovishness that lies within Janet Yellen and her neo-Keynesian buddies. Inflation is the name of the game, and she’s in it to win it.
The previous FOMC minutes statement left traders scratching their heads having priced in a potential rate hike that they felt to be coming. Fed Chair Janet Yellen talked down the dollar from its three-month winning streak with inflation as the focal point.
Inflation has been the focal point of the major central banks, as each seems to enter a currency war with the aim of making their individual currencies worthless.
Why does Yellen want a pickup in inflation? Because disinflation, or the worst case scenario of deflation, would wreck havoc on the current risk asset bubbles.
Low inflation or deflation will bring equity and stock prices lower, and the house of cards known as “quantitative easing” will be exposed. Those fooled in thinking quantitative easing will be over next month are hoping for too much.
QE 1 did not work, so there was QE 2. That failed to do the trick, so there was Operation Twist. Oh, that did not work either? OK, here is QE 3.
Now, we’re in the last remaining taper for the current round of QE as the Fed readies markets for a likely global growth slowdown. Yellen said that rates will remain low with growth prospects hanging in the balance.
A weaker dollar is in the Fed’s best interest. With growth slowing, why would the Fed just go cold turkey?
Yellen has entered the dollar into the currency war, and this is more of a reason to own gold. Some point out that there is no inflation (at least on the books). “And forget inflation – there hasn’t been any inflation for 20 years,” said Edward Meir, metals analyst with INTL FCStone.
There is a reason why, and you can find that out here.
The Fed cannot force the public to spend spend spend, which would spur money velocity – and so disinflation has become the norm.
However, the Fed is creating the perfect storm for when consumers do begin to spend – and this is when Yellen will get her wish, or likely more than she bargained for.
This is not a call to liquidate one’s portfolio and pile it into bullion. However, to ignore the warnings of higher inflation in the near future or the real possibility of a currency crisis would be foolish. And gold would hedge those risks.
Prudent investors, the ultra-wealthy, and China (which saw 2,000 tons of demand last year) are buying gold at these levels, nearly $700 below the peak made in 2011.
From 1914 to 2014, the inflation rate in the US averaged just above three percent. It is currently, 1.7 percent.
For estimation purposes, we can take the last gold bull market from 1970 to 1980 and take the gold high then adjust it for inflation.
Let’s be modest and say the Fed achieves three percent inflation by 2018. Just three percent inflation would signal a potential gold price of $2,614 per ounce. Maybe there is a little more inflation, and we see 2008 levels of five percent. That is an inflation-adjusted $5,247 per ounce. The Real Asset Co. does all the work for you here.
I am not calling $5,000 per ounce gold, yet.
We have seen two market crashes where equities were halved in 14 years, and equities are exhibiting the same behavior, currently. Financial markets will begin to lose confidence in central banking when growth comes to a grinding stop amid all this QE.
Would you refuse to take out car insurance because you’re sure you won’t crash? No – and every month dues are paid for the fateful day you need it the most.
Precious metals will act as insurance in a market that is crash prone.
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Based on that inflation calculator, here’s hoping for a mild case of hyperinflation. A mere 49% would have my eBay pamp fortuna at 657 million!
Ha, that would make anyone’s day. It’s interesting to see the inflation-adjusted calculator over at the Real Asset Co. Just a mere 5 percent by 2018 gives an estimate of over $5,000 per ounce. Could you imagine if the US just revisits inflation seen in the late 70s?
There is a point where manipulation will become futile.
70s inflation… Would be an interesting ride for sure