Higher Gold Price Vs. Inflation Expectations

The actions by the Federal Reserve over the past year have led many to assume that much higher inflation is a foregone conclusion.  This leads to a further expectation that a much higher gold price is imminent.

That sounds logical, but it is not that simple.

There is a relationship between higher gold prices and inflation, but the two are not directly related. The confusion results from a misunderstanding about inflation and its effects.

Inflation is the intentional debasement of money by government and central banks. The inflation is accomplished by the expansion of the supply of money and credit. All governments inflate and destroy their own currencies.

The debasement of money, i.e., inflation, leads to a cheapening of the value of money in circulation. This results in a loss in purchasing power which translates over time into higher prices for most goods and services.

The higher prices are the effects of inflation. Those effects are volatile and unpredictable.

This makes it difficult to rely on simple financial and economic statistics, complicates ordinary business decisions, distorts financial planning projections, and skews the economic cycle.

The skewing of the economic cycle results from the Fed’s efforts to mange the stages of the economic cycle in an attempt to avoid recessions and depressions.

They do not do a good job of it. In fact, the Federal Reserve tends to cause the very recessions and depressions they claim to be trying to avoid.

UNPREDICTABLE EFFECTS OF INFLATION

Inflation is a tool used by central banks to create conditions that allow for all banks to  lend money and finance activities of particular interest to them. Whatever the situation or cause, the money center banks are there to lend money, and profit from it continuously.

Right now people are expecting inflation to get a lot worse because of the Fed’s latest response to financial and economic catastrophe. The inflation, however, has already happened.

The staggering amounts of money and credit expansion in response to last year’s Covid-19 related economic shutdowns, and the subsequent price inflation of financial assets, have some fervently decreeing an imminent dollar collapse and all that that implies.

What most are expecting are much higher prices; maybe even to the extent of what is called runaway inflation, or hyperinflation. Again, those higher prices are the effects of inflation which has already been created.

We said earlier that the effects of inflation are volatile and unpredictable, which is true. That is due in large part to the subjective judgement involved.

Small business owners, large corporations, laborers, hairdressers, restaurant owners, etc., all make subjective determinations about how much to charge for the goods and services we all buy and use.

Investors allow for the effects of inflation when making decisions regarding the purchase and sale of securities, real estate, etc.

In other words, the US dollar’s current level of purchasing power; its standing in world markets, and its degree of acceptance in domestic and international markets are the result of billions of individual choices and decisions that are subjective in nature and always changing.

CREDIT COLLAPSE AND DEFLATION

Now throw into the mix that for several decades, the inflation created by the Fed is losing its intended effect. Even the Fed seemed baffled by the lack of impetus after their actions to revive financial markets and restore economic growth just over a decade ago. (see The Fed’s 2% Inflation Target Is Pointless)

Whatever else some say about the US dollar, whatever are the expectations of certain writers and investors, the US dollar is NOT falling apart. It is not now, nor for the past decade, showing the weakness that some have expected and predicted.

A bigger, more ominous risk is the likely possibility of another credit collapse accompanied by full-scale depression and deflation.  This is the primary fear of the Federal Reserve and other central banks.

Events and conditions such as these are exactly the opposite of those which correlate with “much higher inflation and much higher gold prices.”

What this means is that we will need to see renewed, lasting, significant weakness in the US dollar, manifest in the form of much higher prices for everything we buy and sell, IF gold prices are going to move higher to a degree that matches the fantasies of some investors and advisors.

(also see The Federal Reserve And Long Term Debt – Warning!  Read here to find out about ThinkMarkets)

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