Monday, April 18, 2011

Is the Precious Metals Train Changing Speed or Direction?

I suspect the answer to the above question is 'maybe' for the first part and 'no' for the second.

It also may be that this weekend a well-read blogger laid down the Establishment's gauntlet in an important way regarding the inflation story. Dr. Krugman opined on April 16 in "Inflation, Here and There (Wonkish)":

I’ve taken to looking at the Billion Price Index, which looks a lot like the goods-only, but with much higher frequencies. And right now the BPP index is clearly indicating that the big price bump of early 2011 is fading away . . .
Wage growth hasn’t fallen as much as I expected a couple of years ago; it’s now clear to me that I failed to put enough weight on the downward wage rigidity literature. But there’s nothing here to suggest any reason to consider inflation a problem. (Emph. added)

You may look at the chart of the Billion Prices Project at It shows that as of April 14, the price inflation rate was 0.45% monthly. Even without compounding, that's over 5% yearly. That is down from 0.82% as a monthly price inflation rate on Feb. 18. That's of course about a 10% annual rate without compounding.

I think the average person is completely cynical about the CPI now. After all, if one is just getting by, what is more "core" to one's life than food? In human evolution, eating (and drinking) is of course the most "core" activity possible. It trumps clothing and shelter. And what was fire invented for? Primarily to cook food. Food and energy. Core. Not non-core.

So my point is that we may be nearing a tipping point. Paul Krugman, the representative of the money-printing Establishment, comes out in November with a similar pronouncement that there was to be no price inflation from QE2 (and, let us not forget, the ongoing "QE 1.5" that began, if I remember correctly, in August.
Now that this has been proven wrong, he refuses to accept that the idea of high unemployment and "output gap" has a credibility gap. He doubles down. In that same blog, he merely says that, well, he was wrong, things happen:

March core inflation came in lower than expected, and there’s been a lot of talk about that. But really, when it comes to high-frequency data, stuff happens. People who got all worked up over a bump in prices, seeing it as the harbinger of a big inflationary takeoff, were ignoring the lessons of history, which is that short-run spikes in inflation generally reverse themselves.

Perhaps PK slept through the Carter years.

We also learn today that Dr. Bernanke agrees with his Princeton colleague Dr. Krugman, from

When Federal Reserve Chairman Ben S. Bernanke convenes his first press conference next week, he may emphasize a point the markets seem to have forgotten: He’s serious about keeping interest rates low for an "extended period."

The Mayor of Wall Street's company joins in the supporting chorus by quoting only one commentator on how to invest:

Investors have two routes to profit financially from Bernanke’s determination to keep the federal funds rate near zero for an extended period, said Chris Low, chief economist for FTN Financial in New York.

“Those who think the Fed is making a mistake are tending toward the inflation trade: They’re favoring commodities, favoring TIPS,” Low said. “Those who believe the Fed is right are going for conventional fixed-income and extending in duration.”

Lowe agrees with investors who think the Fed is correct.

“If you’re confident that yields are not going to rise, the return on a five-year note at 2.12 percent is so much higher than the 0.69 percent yield on the two-year,” so extending maturity “can pick up a lot of income,” he said.

Unsurprisingly this is a bull on rates and a bear on "inflation".

What I think is happening is that the people see it one way and the powerful see it another. The people have been deleveraging and paying higher prices for almost everything after the mild price deflation rapidly ran its course. Some of the people have been investing in gold, and more have been investing in "the poor man's gold", which is to say silver.

With both political parties committed to large Federal deficits for years to come, but also committed to tax increases only on "the rich", if that much, the funding for those deficits will either come from savers or from central banks that print new money out of the thin electronic air. To the extent that it is the latter, it does not matter all that much as to whether the creator of the money is the New York Fed or the central bank of a friendly or client state such as Saudi Arabia. The money will find its way into the markets and act like counterfeit money, bidding up the unchanging supply of goods and services.

My sense therefore is that the precious metal bull market remains intact and may strengthen. This is similar to the rise of high-tech to rise from a negligible part of most people's lives to an essential part of mainstream America. Unfortunately, of course, a gold bull market reflects anxiety and panic. It reflects the opposite of virtuous cycle of the disinflationary/deflationary second half of the '90s. It's a thumbs down on the U. S. dollar.

The people and the powerful were on the same side of the tech boom. Now, the Establishment is facing a more difficult challenge. As I have demonstrated above, it is trying to convince people that the tide of rising prices is transient, but it cannot back that assertion up with tight money as it had the resources to do periodically in the 1970s and finally was able to definitively do in the early 1980s with Volckerism/monetarism. Rather than fighting the price inflation it was responsible for with real monetary actions, it is left to fight with words.

I suspect that every day, every week, and every month more and more people are tuning Bernanke-ism out and are taking a fresh look at the world. American investors who do this have been turning to precious metals and foreign currencies as ways to diversify away from the dollar, and I think that the gold train remains a body in motion that will stay in motion in the same direction, and may even hit a downhill grade and pick up speed.

Remember: It took a true dollar crisis, with the U. S. for the first time in the 20th Century issuing bonds denominated in foreign currencies ("Carter bonds") and near-hyperinflation, for the Fed to be forced to raise interest rates well above the rate of price increases. We are not there yet, as the headlines still relate to Greece and Portugal, not the U. K. and the U. S. So I don't see the major trend as being imperiled yet, though of course one truly never knows.

"Don't fight the Fed" is generally a wise strategy. The Fed is holding short-term interest rates way below the rate of price increases. It is increasingly difficult for its acolytes to explain away the reality of what you and I see in our daily lives, and so the Krugmans of the world do what believers in the old paradigm do: they admit small errors (he didn't give enough weight to the "wage rigidity literature" LOL) and tweak formulae. So to not fight the Fed means, to me, not to go short Treasuries but instead to go long assets which tend to appreciate when real interest rates are negative.

I think that more and more real people are realizing that their Federal Reserve Notes are "unreal" money that is losing value at a rapid and perhaps accelerating rate, and that one of the few places they (we) can go to try to protect our alleged wealth is physical assets, as well as shares of companies that can survive and perhaps even prosper in inflationary times.

A closing "addendum". One of the strange things about blogging in the morning is how much markets can change during the time it takes to write the blog. I was going to comment on how, surprisingly, gold was down over $7 in the futures market. That was the story an hour ago, when I began this blog. I was going to point out how illogical that appeared, given today's headlines. Now gold is up $4. Go figure. Did the market come to the same conclusion I have been propounding here? Dunno, but it's time to find out.

Staying tuned . . .

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