Gold
is lagging the raging inflation unleashed by the Fed’s epic money
printing. Despite leading inflation benchmarks skyrocketing to
multi-decade highs, gold prices have barely budged. Serious
inflation initially fuels record-high stock markets, which stunt
gold investment demand. But festering inflation increasingly erodes
corporate earnings, hitting stock prices. As stock markets roll
over, gold will start reflecting this inflation.
Runaway inflation is increasingly plaguing the United States, as
evident in this week’s major economic releases. The December
Consumer Price Index headline number came in up 7.0% year-over-year,
its hottest print since June 1982! That’s a 39.5-year high,
despite the CPI being intentionally lowballed by the government to
mask inflation. Fast-rising general prices slash standards of
living, angering American voters.
This
latest CPI report claimed food and shelter costs only climbed 6.3%
and 4.1% over this past year. Is that your experience? The actual
increases in grocery bills, housing, and rent costs have likely
soared at triple-to-quadruple those pretend trajectories.
Leading into this latest CPI release, new research from Bank of
America reported food, housing, and rent prices have blasted about
27%, 18%, and 12% higher YoY!
Shelter accounts for about a third of the CPI, which is held
artificially-low through a fiction called owners’ equivalent rent.
That is just a survey asking homeowners to guess how much
they’d expect to pay to rent a house of similar quality! Most
Americans who aren’t real-estate professionals wouldn’t have a clue
on that. The CPI is full of similar statistical trickery instead of
using honest hard free-market data on prices.
The
December Producer Price Index showing wholesale price trends looked
even worse, soaring 9.7% YoY! That was a record high in this
current PPI iteration. Far more inflation is baked into the
pipeline, as an intermediate-demand PPI subindex rocketed up
24.4% YoY! These soaring input costs are cutting into corporate
earnings, and will ultimately be passed along to customers driving
more price increases.
Government officials are blaming this crazy inflation on
supply-chain snarls, which is pure misdirection. As legendary
American economist Milton Friedman warned way back in 1963,
“Inflation is always and everywhere a monetary phenomenon.” When
money supplies are ramped faster than economies’ goods and services,
relatively-more money competing for relatively-less things to spend
it on bids up their prices.
Central banks directly control money supplies. In the past 22.3
months since March 2020’s pandemic-lockdown stock panic, the Fed has
mushroomed its balance sheet an insane 110.8% higher or $4,607b! By
directly monetizing $3,187b of US Treasuries and $1,243b of
mortgage-backed bonds, the Fed has effectively more than doubled
the US-dollar monetary base! Such extreme excess is
wildly-unprecedented.
All
those trillions of dollars the Fed conjured out of thin air to buy
bonds were quickly spent, injecting that vast deluge of new money
into the real economy. With monetary growth greatly exceeding
underlying economic growth, prices of almost everything are surging
to reflect vast oceans of new dollars sloshing around. Except
gold’s, history’s premier inflation hedge has largely slept through
this money-printing orgy.
When
the Fed first redlined its printing presses in that stock panic,
gold did surge dramatically powering 40.0% higher over the next 4.6
months. But the
huge investment-capital inflows fueling that massive upleg left
gold
extremely-overbought in August 2020, so it has mostly been
consolidating sideways ever since. That has created an
enormous pennant
chart formation on the verge of an imminent forced breakout.
That
should spawn a major new bull-market upleg where gold will start
reflecting the more-than-doubled US-dollar supply. But for now,
gold is really lagging the Fed’s raging inflation. This chart
superimposes real inflation-adjusted gold prices over the
year-over-year changes in the CPI during this metal’s secular bull.
These real gold prices are CPI-calculated, while gold’s gains and
losses are shown in nominal terms.
Gold’s current secular bull was born in December 2015, incidentally
the day after the Fed launched its last rate-hike cycle. Since then
gold has powered 96.2% higher at best over 4.6 years as of August
2020. That big post-stock-panic upleg catapulted gold to an
all-time nominal high of $2,062. But in real inflation-adjusted
terms, gold had been much higher the last time inflation was so
out-of-control four decades earlier.
In
this bull’s first 4.2 years into February 2020, headline inflation
wasn’t an issue. The monthly CPI report averaged modest 1.9%-YoY
gains in that span. Gold’s usual drivers were responsible for its
meanderings then, speculators’
leveraged
gold-futures trading and investors’ gold-investment demand. The
latter was retarded by US stock markets climbing to record highs in
much of that time, leaving gold languishing out of favor.
Reported inflation started collapsing in March 2020 on governments’
draconian COVID-19 lockdowns and the resulting stock panic. By a
couple months later in May, CPI inflation had shriveled up to just
+0.1% YoY. Gold averaged $1,719 that month when Fed officials
feared lockdowns would spawn deflation and a full-blown depression.
So to ward that off they had spun up their monetary printing presses
to lightspeed.
Through March, April, and May that year alone, the Fed monetized
$1,635b of US Treasuries shooting its balance sheet 70.7% or $2,939b
higher! That epic monetary spewing sowed the seeds for
today’s ruinous inflation. Rather than start removing that extreme
monetary excess as the stock markets soared and the economy
recovered, the Fed kept the pedal to the metal. Its balance sheet
kept on
relentlessly growing.
But
the CPI didn’t reflect that colossal money printing right away,
averaging just 1.4%-YoY increases from June 2020 to March 2021.
Economies can only absorb big money-supply changes gradually, so it
takes time for prices to adjust to them. But with the CPI surging
4.2% YoY in April, it was becoming apparent the Fed’s record flood
of new money was starting to bid prices higher. Fed officials
argued inflation was “transitory”.
Boy
were they wrong! From April to December 2021, even the
intentionally-lowballed CPI had headline prints surging 4.2%, 5.0%,
5.4%, 5.4%, 5.3%, 5.4%, 6.2%, 6.8%, and 7.0% YoY. This raging
inflation is becoming so politically-damaging to the government that
drastic measures will soon be taken to hide it. The Bureau of Labor
Statistics responsible for the CPI is changing its methodology
starting with the next report.
Back
at the end of August, the BLS said “Starting in January 2022,
weights for the Consumer Price Index will be calculated based on
consumer expenditure data from 2019-2020. The BLS considered
interventions, but decided to maintain normal procedures.” Whatever
this means, there’s no doubt it will lead to lower claimed
inflation based on the BLS’s long track record of obscuring
inflation rather than reporting it.
But
regardless of what government statisticians claim to keep their
political bosses happy, Americans running households and businesses
know exactly what their own real-world costs are doing. My wife and
I are shocked at how much more money it takes to maintain our
family’s standard of living. I’ve talked with dozens of friends and
heard from hundreds of subscribers about inflation, and they all
feel the same way.
But
gold isn’t yet reflecting this new world with vastly more dollars
bidding up prices universally. In December as even this fake CPI up
7.0% YoY revealed the hottest price increases since June 1982, gold
only averaged $1,792. In this 19.0-month span where the headline
CPI inflation rate exploded 59.7x higher, monthly-average gold
prices merely edged up 4.3%. That is terrible performance
given this monetary backdrop.
Again a couple major factors explain gold’s lack of response to this
raging inflation so far. That summer-2020 rocketing to all-time
nominal highs left gold extremely-overbought, so it needed to suffer
a normal and healthy major correction to rebalance sentiment. And
the record-high stock markets directly fueled by the Fed’s extreme
monetary deluge slayed interest in prudently diversifying
stock-heavy portfolios with gold.
But
gold’s high consolidation has run its course with that major
breakout imminent, both sentiment and technicals call for gold’s
next bull upleg to soon start marching. And these
money-printing-levitated stock markets trading at
dangerous bubble
valuations are in a world of hurt as persistent price increases
cut into both corporate earnings and revenues. Gold
investment demand will roar back as stock markets weaken.
The
great majority of investors today don’t remember how gold really
fares in inflationary times driven by Fed monetary excesses. The US
economy hasn’t faced similar bouts of serious inflation since way
back in the 1970s to early 1980s. To be old enough to be
investing then, traders would have to been born by the
mid-1950s. So no one under retirement age now has ever experienced
anything like today’s inflation!
That
includes me, a mid-1970s baby. Thus before assuming gold won’t
respond to the Fed’s radically-unprecedented monetary excesses of
the last couple years, it is prudent to see how gold fared the last
time inflation ran this hot. So this next chart applies this same
headline-CPI-YoY and CPI-adjusted-real-gold methodology to the
1970s. Gold has a long track record of incredible performance
in inflationary times!
In
real-inflation-adjusted terms, gold’s all-time high of $3,046 in
today’s dollars came in January 1980. That capped a gargantuan
10.0-year secular bull where gold skyrocketed up a legendary
2,332.0%! A major driver of those life-changing gains was the
raging inflation of that time. Note the high correlation between
gold price trends and CPI-YoY changes during that decade. Gold
mostly followed inflation in lockstep.
The
1970s saw two serious headline-inflation spikes, the first peaking
in December 1974 at a +12.3%-YoY CPI. That inflation acceleration
ran 30.0 months, ultimately catapulting the annual CPI increase 4.6x
higher. In monthly-average terms between the CPI’s +2.7% starting
month and +12.3% ending month, gold prices soared 196.6% higher.
The yellow metal nearly tripled during the 1970s’ first
serious inflation!
Gold
was certainly volatile within that highly-inflationary span,
enjoying enormous uplegs followed by big bear-level corrections.
But overall gold was a fantastic investment while inflation ravaged
stock markets. For comparison between that June 1972 CPI trough and
December 1974 CPI peak, the flagship S&P 500 US stock index
collapsed 37.9% in monthly-average terms! Gold is the place to be
during serious inflation.
While today’s 7% CPI price increases sound much milder than the
mid-1970s 12% ones, realize the CPI decades ago was more honest.
Bureaucrats were nowhere near as pressured by politicians to
fabricate and heavily massage data to make government policies look
better. Since the 1970s the CPI has been changed many times, all
lowering reported inflation. Today’s CPI would be way higher
with 1970s’ methodologies!
Consider that owners’-equivalent-rent farce alone. The third of the
current CPI accounting for shelter is again reported at mere
4.1%-YoY growth. Various market measures of rents and US-house
prices are showing increases from 12% to 20% YoY. Around the middle
near 16%, that is still quadruple the BLS’s ludicrous shelter-price
claim. Just 16% shelter alone would catapult today’s overall
headline CPI to +11.0% YoY.
Most
inflation-studying economists who aren’t employed by Wall Street to
pump and rationalize bubble-valued stock markets agree that
real-world inflation today is much higher than the CPI
indicates. OER is just one component of that lowballing. Another
is medical expenses, with the BLS now claiming medical costs have
only risen by 2.5% YoY! Can you imagine medical bills ever not
rising an order of magnitude more?
That
1970s secular gold bull actually suffered a multi-year bear as
inflation rates backed off in the middle of that decade. Gold
didn’t start marching higher again in late 1976 until CPI
disinflation stalled. Then as inflation started surging again, gold
was off to the races in a mighty run that would ultimately climax in
a famous popular speculative mania. Gold’s gains were enormous
as money-printing-driven inflation soared.
The
headline CPI started up 4.9% YoY in November 1976, but ultimately
soared to a soul-crushing 14.8% in March 1980. The pace of
inflation soared 3.0x over that long 40.0-month span. That worked
wonders for gold investment demand, which fueled enormous 322.4%
gains in monthly-average gold prices during that
serious-inflationary bout! Gold more than quadrupled the
last time runaway inflation racked the US!
Already deeply-undervalued from their early-1970s inflationary
pummeling, the US stock markets didn’t plunge much farther. But in
monthly-average terms from that late-1970s CPI trough to peak, the
S&P 500 still only eked out a 3.5% gain. Gold was a vastly-superior
investment when inflation last ran at super-hot levels
similar to today. Sooner or later stock investors will figure that
out and diversify their stock-heavy portfolios.
Gold
investment now is effectively zero, so it won’t take much of
a reallocation to drive gold prices far higher. Exiting December,
those elite S&P 500 stocks averaging a dangerous-bubble 33.6x
trailing-twelve-month price-to-earnings ratio had a collective
market capitalization of $43,000.3b. Meanwhile the combined
holdings of the dominant GLD and IAU gold exchange-traded funds were
worth just $85.5b.
This
proxy of American stock investors’ percentage allocation to gold was
vanishingly-small under 0.2%. For centuries 5% to 10% in gold was
considered the minimum prudent amount, because gold tends to rally
when stock markets weaken. If Americans even diversify enough to
bring this allocation measure up to 2.0%, that huge demand will
catapult gold way higher. Gold has lots of room to run in its
current small bull.
Again up 96.2% at best, that’s only about 1/24th the size of the
1970s’ inflationary super-bull. Since the gold market is vastly
larger today, we aren’t going to see 2,300%+ gains again. But 200%
to 300% isn’t a stretch at all given the Fed’s epic monetary deluge
in recent years. This raging inflation will persist until the Fed
hikes its federal-funds rate way above CPI inflation rates or
drastically shrinks its bloated balance sheet.
Neither is going to happen, because either would crash these
bubble-valued stock markets. At the latest FOMC meeting, Fed
officials forecast three quarter-point hikes each in both 2022 and
2023. That would take the federal-funds rate to 1.5% by the end of
next year. That won’t even faze serious inflation. During those
December 1974 and March 1980 peak-CPI-inflation months, the FFR
averaged 8.7% and 17.2%!
And
that $4,607b of quantitative-easing money printing since March 2020
isn’t going to be meaningfully unwound no matter
how tough Fed
officials talk. It’s no coincidence the S&P 500’s 114.4% gain
at best since then closely matches that epic 110.8% balance-sheet
expansion. While the Fed might find the courage to dabble in
quantitative tightening, it would wreak havoc on these QE-levitated
bubble stock markets.
If
the Fed can’t fight this raging inflation it unleashed without
spawning a brutal stock bear that would at least maul stock prices
in half, it won’t. That means interest rates will stay
abnormally-low and the Fed’s balance sheet will remain
grotesquely-bloated, allowing this inflation to fester for years.
That is really bearish for stock markets and super-bullish for
gold. Make no mistake, gold won’t keep lagging inflation for long!
The
biggest beneficiaries of much-higher gold prices ahead are the
fundamentally-superior
mid-tier and
junior gold stocks. They rallied sharply with gold into
mid-November, but were dragged back down to their stop losses by
another bout of heavy gold-futures selling. Our stoppings averaged
out to neutral, fully recovering our capital. So we’ve been
aggressively redeploying buying back in low in our
newsletters.
If
you regularly enjoy my essays, please support our hard work! For
decades we’ve published popular
weekly and
monthly
newsletters focused on contrarian speculation and investment. These
essays wouldn’t exist without that revenue. Our newsletters draw on
my vast experience, knowledge, wisdom, and ongoing research to
explain what’s going on in the markets, why, and how to trade them
with specific stocks.
That
holistic integrated contrarian approach has proven very successful.
All 1,247 newsletter stock trades realized since 2001 averaged
outstanding +21.3% annualized gains! Today our trading books are
full of great fundamentally-superior mid-tier and junior gold,
silver, and bitcoin miners to ride their uplegs. Their recent
realized gains into stoppings have run as high as +63.3%.
Subscribe today
and get smarter and richer!
The
bottom line is gold is only lagging inflation temporarily.
Fed-levitated record-high stock markets have retarded gold
investment demand, while the yellow metal consolidated high after
massive mid-2020 gains. But this serious inflation will
increasingly erode corporate earnings, forcing bubble-valued stock
prices much lower. And gold is nearing a major forced breakout from
a gigantic bullish technical chart formation.
So
gold prices should soon start reflecting this raging inflation
unleashed by the Fed’s extreme monetary excesses. Gold soared by
multiples during the last serious-inflation bouts in the 1970s as
stock investors diversified into it. And since the Fed can’t hike
rates high enough to fight today’s inflation without crashing these
bubble-valued stock markets, high-and-rising prices are likely to
continue festering for years to come. |