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Will Stagflation Break Gold's Stagnation?

By Sunshine Profits (Arkadiusz Sieron)CommoditiesSep 10, 2021 03:56PM ET
www.investing.com/analysis/will-stagflation-break-golds-stagnation-200601578
Will Stagflation Break Gold's Stagnation?
By Sunshine Profits (Arkadiusz Sieron)   |  Sep 10, 2021 03:56PM ET
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One word shakes the markets, causing a lot of fear: stagflation.

Is it coming? Will it push gold out from stagnation? Let’s find out.

One of the greatest risks cited currently by the markets is stagflation. The term means a situation in which there is high inflation and stagnation at the same time. So far, we have only had high inflation (CPI annual rate has soared 5.4%, and almost 5% if we take the quarterly average), but some analysts believe that inflation has already peaked. However, the economic growth is fast (the GDP surged 12% in Q2 2021 year-over-year), as the chart below shows. So, why bother?

Real GDP Growth And CPI.
Real GDP Growth And CPI.

Well, although a recession is not lurking around the corner, slowing economic momentum quite clearly is. The GDP growth for the second quarter (although impressive) came below expectations, the consumer confidence declined and, more generally, the index of U.S. data surprises has recently turned negative.

Among negative surprises, is the decline in retail sales by 1.1% in July, which was worse than expected (0.3%) and the drop in the New York Fed’s Empire Manufacturing Index from 43.0 in July to 18.3 in August, much below the expected 29.0. So, the recent decline in the bond yields may not be as nonsensical as it may seem.

I warned my readers a long time ago that the recovery from the pandemic would be spectacular but short-lived and caused mainly by last year’s low base. If you lock the economy, it plunges; when you open it, it soars, simple as that. Now, the harsh reality steps in, and it’s yet to be seen how the U.S. economy will perform in a post-pandemic reality with the spreading Delta variant of the coronavirus, a slowdown in China’s economy, and without government stimulus.

When it comes to the price front, it’s also highly uncertain. Inflation has softened a bit in July, but it remains high, and I’m afraid that it could prove to be more persistent than it’s believed by the Fed and some analysts. The latest Empire Index, mentioned above, tells us: although the index of manufacturing activity fell more than expected, the inflationary pressure strengthened. As the report says, “input prices continued to rise sharply, and the pace of selling price increases set another record.”

What’s disturbing in all this – and this is why inflation may stay with us for longer – is that the Fed is downplaying the inflation risk. And even monetary policy 101 says that the best way of preventing inflation is acting early as inflation pressure builds up. Friedrich Hayek, a great economist and a Nobel Laureate, once compared taming inflation to catching a tiger by the tail – it’s not an easy task when the cat has already escaped the cage. The problem is that when central bankers wait to see the whites of the inflationary tiger’s eyes before acting, it’s already too late. If you stare at the tiger in the eyeballs, you will probably to be eaten soon – unless you hike interest rates abruptly, choking economic growth off.

Going into specifics, the Fed’s view that inflation is transitory mainly rests on the belief that price increases are caused by supply disruptions related to the pandemic. However, inflation is not limited to just a few feverish components — it’s broad-based. In particular, the cost for shelter, the largest component of the CPI, has also been gradually rising, even though the owner’s equivalent rent component doesn’t reflect properly the recent record surge in U.S. home prices (see the chart below). If this is not inflation, I don’t know what is!

The increase in house prices is important here, as Gita Gopinath, chief economist and director of the IMF Research Department, admitted at the end of July: “More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation.”

What does it all mean for the gold market? Well, stagflation should be negative for almost all assets. When we have a stagnant economy coupled with high inflation, stocks and bonds are selling off together. In such an environment gold shines, as it is a safe haven uncorrelated with other assets.

Stagflation is so terrifying because the Fed won’t be able to rescue Wall Street simply by cutting interest rates, as it could only add fuel to the inflation fire. The only viable solution would be to engineer another ‘Volcker moment’ and tighten monetary policy decisively to combat inflation. Given that debts are much higher than in the 1970s and some analysts even point to a debt trap, it could put the economy into a severe economic crisis. So far, investors seem not to worry about high inflation, but just as things go well until they don’t, investors are relaxed until they aren’t. For all these reasons, it seems smart to own such portfolio diversifiers as gold.

Will Stagflation Break Gold's Stagnation?
 

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Will Stagflation Break Gold's Stagnation?

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Comments (8)
Maseko Manufacturings
Maseko Manufacturings Sep 13, 2021 5:35PM ET
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Bulls @n Gold From Johannesburg Gold town.
Vlad Lozovskiy
Vlad Lozovskiy Sep 11, 2021 9:19PM ET
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Left is looking for issue everywhere, and doesn't see that handouts cause that.
Grant McBride
Grant McBride Sep 11, 2021 12:29PM ET
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my hairdressers prices went up 12% and the local restaurant has a 8% Covid surcharge.Double whatever number the government gives you and you'll have the real inflation number.
Val Mirov
Val Mirov Sep 11, 2021 12:29PM ET
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Then subtract that percentage point from the current gold’s price to arrive at gold’s real value
Casino Crypt
CasinoCrypt Sep 10, 2021 8:15PM ET
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The Fed , ECB is at war against gold because they know printing of unlimited money is eroding the power of their currencies. In real terms Gold should be priced at about $2400 by now considering the current hidden and toxic assets coupled with Brexit mess/ Pandemic/ Climate crisis.
Kochar Bipin
Kochar Bipin Sep 10, 2021 7:12PM ET
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Stupid article - the sharp rise in commodity prices is due to China (which has over 50% of the capacity) imposing a cut of 25-30% on steel, aluminum and discouraging exports chocking off supply of these strategic metals to EU and US who have closed many of their domestic plants in favour of importing these from China. Chip shortages are due for surge in demand for these due to pandemic - interestingly again 60-70% of these strategic items are made in South China Sea bordering nations. The focus hence should be massive investment to de-risk the world from China's ********
Casino Crypt
CasinoCrypt Sep 10, 2021 7:12PM ET
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The Chip shortage issue is a convenient lie . Many links in the chip production life cycle are completely broken  The lies of shortage is to prevent a panic in the market as the  Nasdaq is built on just a few major tech companies .
satoshi nakomoto
satoshi nakomoto Sep 10, 2021 7:12PM ET
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yeah, the fact that there 30% more USD in circulation than in early 2020 had nothing to do with higher prices.
milena villa escobar
milena villa escobar Sep 10, 2021 6:17PM ET
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Great article.  Well laid out y understandable
Jason Patcher
Jason Patcher Sep 10, 2021 6:02PM ET
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austerity...
Donald Schneider
Donald Schneider Sep 10, 2021 4:47PM ET
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personally that's why I think the FED keeps saying this thing is temporary, I think their tax is stagflation and that's what they're going to plan on doing if they begin the taper before the first of the year. they don't want to address the digital currencies, and the bond market is about to raise it ugly head. It will quickly snowball, all the various fed people keep jabbering and they don't understand that this market is on edge, they do nothing and when they're really required to say something they say nothing and then they just keep prodding and making people nervous. It's really a bad time of year to be doing that.
 
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