Money-Pumping Clears the Path for Gold, Silver

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Money-Pumping Clears the Path for Gold, Silver

Taken from On Target 268

The way governments have acted to deal with the pandemic has come as a shock to all of us. A big shock. They have thrown money at the problem on a scale rightly compared with that of fighting a world war, abandoned any pretence of thrift in public affairs, and ordered about their citizens like schoolchildren. With hardly any opposition.

Will things eventually revert to the ways they were before the virus invaded our lives? I think not. Politicians and bureaucrats have found it amazingly easy to abandon the many restraints that limited their power. They like their sudden freedom to boss people around. They won’t easily give up their new-found powers. They will use them to advance the things they favour. Policies that encompass lavish spending to deliver political objectives, giving little priority to worrying about debt, and with easy recourse to digital “printing” of money and ultra-cheap credit are going to be the New Normal.

A “climate change” in monetary policy is taking place that will transform the outlook for inflation and therefore for investment assets say Ronald-Peter Stoeferle and Mark Valek in their annual heavyweight research study In Gold We Trust.

“Governments have embraced their role as big spenders… Whether it is debt-financed subsidies for ‘green’ companies, or permanent transfer payments to ever-larger parts of the population, there are more and more goals that are seen as so important that higher debt is accepted for them.” With constraints ignored, there is now a “permissive fiscal zeitgeist.”

Even the central bank governors of former hard-currency countries in Europe are now encouraging politicians responsible for budgets to run even higher deficits. Central bankers have abandoned their traditional role – safeguarding price stability – to speak out on essentially political issues such as climate change, income inequality.

An “almost unlimited wave of liquidity has been flooding the markets.” Resulting inflation will force central banks to implement what’s called “yield curve control” and “financial repression” – interest rates will be kept negative in real terms (below rates of inflation).

What does a world with significantly higher inflation rates mean for the gold price?

“After hibernating for years, commodity prices have now awakened. In such a market environment tangible assets – especially commodities, selected equities in the right sectors, and obviously precious metals – should form the solid basis” of an investment portfolio.

Stoeferle and Valek, whose Incrementum consultancy is based in Liechtenstein, say the options market gives a significant probability of a new all-time high for gold above $2,100 an ounce in December this year. Their own “conservative” price target for 2030 is $4,800. But with stronger inflation – and the chances of that look increasingly likely — $8,900 could be expected by the end of the decade.

They warn that the financial world is “ill-prepared for monetary climate change” as there are almost no fund managers operating who have experienced an inflationary environment during their active investment careers. The bulk of them could be caught on the wrong foot.

What’s more, most portfolio strategies are based on historical data going back ten, 20 or at most 30 years. “Very few still consider the inflationary environment of the 1970s,” when portfolios had to cope with crushing rates as high as 20 per cent.

Money-Pumping Clears the Path for Gold, Silver taken from our ‘On Target Newsletter’ issue no 268

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