Fireworks to Come When Public Realizes Inflation Is Not “Transitory”

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

As inflation continues to heat up, gold and silver markets are once again on the verge of breaking out.

On Thursday, the Bureau of Labor Statistics released its much-anticipated Consumer Price Index data. The CPI came in at a full 5.0% year-over-year through May.

The so-called “core” rate, which excludes food and energy, showed an annual increase of 3.8%. That represents the biggest jump since all the way back in 1992.

Meanwhile, Federal Reserve officials continue to downplay the inflation threat. They insist the recent surge is transitory and doesn’t reflect a major trend to come.

But as Denver’s local 9NEWS reported, not all economists are echoing the Fed’s messaging on inflation.

News Report: We are again, talking about inflation. That’s when prices rise for all sorts of goods and services, therefore our money buys less. It is happening now. Although many economists think it’s only temporary and will stabilize once supply disruptions and other effects of the pandemic wear off. But the chief economist for Deutsche Bank disagrees saying that the aggressive stimulus and economic changes in the U.S. will cause inflation to get worse for the next several years.

Investors seem unconcerned about the prospects for future high inflation – at least judging by the market’s response to yesterday’s CPI headline. The S&P 500 crept up to a slight new record high while bond yields actually moved lower by the end of the day.

As for precious metals markets, gold and silver each advanced slightly toward the tops of their recent trading ranges.

Gold managed to close back above the $1,900 level on Thursday. Here on this Friday recording, the monetary metal has dropped back below that threshold and currently trades at $1,887 an ounce and registers a slight weekly loss of 0.6%.

Turning to the white metals, silver is up 1.2% this week to bring spot prices to $28.23 an ounce. Platinum prices are down 1.3% to trade at $1,164. And finally, palladium checks in at $2,811 per ounce after dropping 2.3% for the week.

Metals markets stand to benefit from rising inflation expectations. And interest rate sensitive markets including bonds stand to suffer.

Given an inflation rate of 5%, bondholders and cash savers stuck in low-yielding instruments are already suffering significant real purchasing power losses. Yields would have to move markedly higher in order to generate positive after-inflation returns.

But the last thing the U.S. Treasury wants is to have to pay more interest on its ballooning debt. Key to keeping the government afloat financially is making sure rates stay suppressed at the same time as the Fed pursues policies of higher inflation that knock down the real value of debt.

The scheme works as long as the public can be convinced that high inflation is transitory. And that when the official measures of inflation come in relatively tame, they actually capture the full extent of price levels in the economy. The Fed’s preferred “core” rate of inflation excludes food and energy and fails to track actual home prices – some of the biggest real-world costs for consumers.

When the public stops believing the propaganda about inflation and starts seeking protection from it, we could see a massive flight from bonds and cash into quality assets.

In an inflationary environment, quality assets are those that can retain or gain value in real terms.

Some stock market sectors may fare relatively well. The natural resource sector in particular has the potential to generate gains amid rising inflation.

In general, companies that have pricing power and the ability to raise their dividends would be considered high quality.

At the end of the day, though, stocks are financial assets and are vulnerable to selling off in the event of broader market instability.

Although no asset is impervious to losing value over any given day, week, or month, real money itself has an unparalleled track record for retaining value over time.

Real money isn’t represented by U.S. Federal Reserve Notes or other fiat currencies. Real money is represented by gold and silver.

Unlike financial assets, physical precious metals carry no counterparty risk and are not dependent on third-party promises to pay. The value of gold and silver is the metal itself.

An argument can be made that precious metals are the highest quality assets an investor can own. Gold, in fact, is considered by the Bank for International Settlements to be a “Tier 1” asset within the banking system.

Even central banks around the world, despite refusing to redeem their fiat currencies in gold, continue to hold and accumulate gold in their own reserves. They evidently don’t consider a portfolio consisting entirely of paper promises to be prudent!

A flight to quality may be coming. It will be to investors’ advantage to accumulate quality assets including physical precious metals before the herd sends their prices much higher.

In other news, one of our top allies in Washington DC – Alex Mooney, a Republican U.S. Congressman from West Virginia – is asking the Treasury Department to come clean on some if its secretive gold activities.

Mooney sent a stiff letter this week to Treasury Secretary Janet Yellen, asking for information on how much U.S.-owned gold has been delegated to the Federal Reserve Bank – and for what purposes.

Mooney also wants to know about the gold the United States has pledged to the International Monetary Fund – including where it’s stored, whether it’s been audited, and for what specific purposes it’s being used. We’ll see if Yellen is actually willing to provide any meaningful answers to these and the other questions he posed. If she isn’t, that itself will be telling.

Mooney’s inquiry comes shortly after he introduced H.R. 3526 to require the Comptroller General to immediately conduct a full assay, inventory, and audit of the United States’ gold reserves and repeat the process every five years.

Most Money Metals readers know there is at least some evidence the U.S. Treasury may have sold, swapped, leased, or otherwise placed encumbrances upon some of America’s gold over time.

However, federal government officials have strongly resisted disclosure of these activities for decades.

To address these concerns, H.R. 3526 also requires a full accounting of any and all sales, purchases, disbursements, or receipts, a full accounting of any and all encumbrances, including due to lease, swap, or similar transactions presently in existence or entered into in the past 15 years, and an analysis of the sufficiency of the measures taken to ensure the physical security of such reserves.

To fulfill its obligations under the Gold Reserve Transparency Act, Government Accountability Office auditors would gain access to any depository or other public or private depositories where reserves are kept as well as related records.

To help push this important legislation forward, we ask all gold and silver investors to reach out to their congressional representatives as soon as possible – and ask them to cosponsor and seek roll call votes on H.R. 3526.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.