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Stagflation will Ignite Gold and Silver Prices
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It brings me no joy to describe to you the economic mess in which Australia and the world currently finds itself in.
For years I have been warning Australians about the dangers about Australia’s household and foreign debt bubbles coupled with the largest global debt bubble in world history. I have warned that these bubbles will bring tremendous economic and social harm to millions of Australians.
The policy response to COVID-19 – that being the decision to lockdown (which actually is contravention to the recommendation of the World Health Organisation) and the unprecedented economic stimulus measures – has brought forward the Economic Armageddon scenario which I long forewarned.
Back in 2018, I published an article with news.com.au entitled: six pathways to Australia’s ‘economic armageddon’ (see link below) which mapped out 6 scenarios of how the economic crisis is going to play out.
Three of the scenarios were based on a deflationary situation where global debt is shrinking resulting in a series of sizeable global defaults by governments, corporations, households and financial institutions.
Alternatively, the other three scenarios were based on an inflationary situation where Australian and global debt continues to grow resulting from ever increasing fiscal and monetary stimulus.
Of these three inflationary scenarios, one of the scenarios which I warned of was stagflation, which is now the scenario which I believe is now happening and which will have profound impacts on ordinary Australians – especially for those who are not prepared.
What is Stagflation?
Stagflation being a combination of:
- olow (or even negative) economic growth;
- ohigh unemployment & underemployment and therefore reduced incomes; and
- orising prices.
Stagflation squeezes middle class families as they struggle to generate enough income to afford the basics of life such as housing, food, transport, childcare, etc given that incomes are suppressed due to the weak economy at the same time prices are rising resulting from monetary inflation (i.e. an increase in the money supply).
From an economic theoretical perspective, stagflation posed a theoretical conundrum of mainstream Keynesian economists when this emerged in the 1970s, because during economic recessions and high periods of unemployment, prices are supposed to fall, not rise.
This from the Keynesian paradigm is based on the premise that unemployment rises because aggregate demand is falling.
During periods of stagflation, living standards fall for citizens who have not taken precautions to diversify their income sources and protect their purchasing power. Alternatively, for those who are positioned appropriately and early, stagflation can be a period where significant fortunes can be made.
In the 1970s, economic hardship unfortunately occurred for the majority of citizens both in Australia and around the world.
In 2020, stagflation in Australia has an added complication compared to the 1970s given the scale of household and foreign debt bubbles which has resulted in sky high real estate and land prices. For many Australians who are already experiencing skyrocketing mortgage and rental stress, stagflation is going to exacerbate existing economic pressures, especially those who have high debt levels and tight household budgets.
From a portfolio allocation perspective, it is important to note that during the stagflation of the 1970s, physical gold and silver outperformed all other asset classes given that there was a focus by institutions and individuals to protecting their purchasing power.
For example, Gold in US dollar terms skyrocketed from $US 35 per ounce in 1971 to $US 850 per ounce in 1980 representing an increase of more than 2,328%, whereas silver skyrocketed from $US 1.55 per ounce in 1971 to $US 50 per ounce in 1980 representing an increase of more than 3,125%.
Evidence of Stagflation?
In the past month, several announcements have been made by central banks around the world to the effect that there will be a concerted effort to increase monetary stimulus and to allow the rate of inflation to rise above previously defined targets.
United States
For example, last week, the Chairman of the US Federal Reserve Jerome Powell announced it was abandoning its previously defined inflation target of 2% and instead was now seeking a long-term target average of 2%, meaning inflation would be allowed to run above 2% given consecutive years of officially recorded inflation being under 2%.
United Kingdom and New Zealand
In the UK and New Zealand, both Governors of the Bank of England (Andrew Bailey) and the Reserve Bank of New Zealand (Adrian Orr) have both committed their countries to greater amounts of quantitative easing in the short term and have both flagged preparations for the introduction of negative nominal interest rates.
Such an introduction of negative nominal interest rates would result in Britain and New Zealand joining the ranks of the European Union and Japan who have already introduced negative interest rates in the past few years.
Australia
In the Australian context, COVID-19 restrictions led to all levels of government unleashing the largest fiscal and monetary stimulus package in Australian history which includes the lowest official interest rates in history and the introduction of quantitative easing – the printing of money to purchase Federal, State and Territory government bonds in the secondary market.
This stimulus package has seen public debt blow out to mind boggling unprecedented levels and annualised growth in the money supply as measured by ‘Broad Money’ (the Reserve Bank of Australia’s broadest definition of money) to an 11 year high – the high since June 2009.
However, the existing the fiscal and monetary stimulus is not enough to keep Australia’s household debt bubble intact which is at risk from rising unemployment which is expected to peak at 10% by the end of 2020.
Thus, in addition to the existing stimulus measures, new calls for additional stimulus have begun, including in the past 2 weeks by the Governor of the Reserve Bank of Australia who called on State and Territory Governments to increase infrastructure spending by $AUD 40 billion in order to minimise involuntary unemployment. Such increased stimulus spending would ultimately be financed through the RBA’s quantitative easing program (i.e. money created out of nothing).
Thus, as the Australian economy stagnates and unemployment rises, additional fiscal stimulus which is financed through money printing will lead to the Australian dollar losing purchasing power and thus rising prices – which is stagflation.
Stagflation will Ignite Gold and Silver Prices!
Ever since the announcement of QE to infinity in late March 2020 and rising concerns about stagflation, there has been a radical sea change in the gold and silver markets.
Around the world there has been a mad scramble for physical gold and silver bullion which has led to a chronic shortage, particularly at the wholesale level and particularly in silver. This is in part because the size of the gold and silver markets are both small in size relatively to the dollar value of the rest of the global financial system.
Thus, there are plenty of fiat currency chasing a very small amount of tangible physical gold and silver.
As I have noted in several articles during 2020 about the gold and silver market which are posted on my adamseconomics website, the price of gold and silver (particularly silver) have been heavily manipulated by international banks who control the pricing mechanism both in London via the over‑the-counter (OTC) market as well as in New York via the COMEX futures market.
Since March 2020, the global scramble for gold and silver bullion will led to an unprecedented amount of physical gold and silver bullion being required to be delivered at the COMEX.
This global rush led to the ‘paper futures market’ breaking in late March 2020 resulting in significant losses for the bullion banks who have been deeply involved in the price manipulation of both gold and silver (this includes for example HSBC losing $US 200 million in one day of trading in the gold market).
The lack of available gold and silver to meet delivery requirements have been one of the reasons for the sharp rise in the price of gold and silver during July and early August 2020.
For those interested in a detailed explanation of these events, I would encourage you to read the columns which I have published on my adamseconomics website.
Going into September 2020 and the quantity of physical silver which is being demanded to be delivered on the COMEX is significant. Whereas, the participating bullion banks were required to deliver over 84 million ounces of physical silver in July 2020, it would appear that in September 2020 (i.e. the coming 4 weeks), more than another 70 million ounces of physical silver will be required to be delivered.
Early indications are that the bullion banks are desperately scrambling to find this requisite amount of physical silver.
It is this desperation which has led many silver market analysts to forecast a dramatic rise in silver price in the coming 4 weeks with some even forecasting a silver price north of $US 50 per ounce by the end of September.
Nevertheless, irrespective of the price action which will take place in September 2020, the trend in both the gold and silver market is clear.
Ever greater amounts and more radical forms of fiscal and monetary stimulus will lead to greater inflation (even in the official inflation measurements as published by national governments) as well as a loss of confidence in fiat currencies.
Institutions and individuals, around the world, in seeking to protect their wealth will increasingly turn to physical gold and silver as a store of value. This ever-greater demand will exacerbate the physical shortages already observed thus pushing the price of physical gold and silver to new all-time highs.
For those As Good As Gold Australia customers who have already bought your physical gold and silver allocation you have picked your timing well. For those who are seeking to purchase more physical gold and silver bullion, the window in which to purchase at relatively cheap prices is coming to an end very soon.
The coming weeks and months ahead will be very rough for many Australians. I sincerely hope that you are able manage these economic conditions well and that As Good As Gold Australia can assist you manage these adversities and challenges.
We are here to help.