There is enormous embedded inflation already and more to come. The high-powered money has already been created; it is leveragable and it is there to increase velocity. It is politically expedient for policy makers to inflate away the burden of existing and future US debt repayment. As such, higher prices must follow.
Investing in gold is tough because it challenges the investor to come to terms with the faults of his or her government, and then to act upon them. It requires the admission that there is risk in holding cash. This is counter-intuitive to this generation’s vintage of financial asset investor accustomed to thirty years of a credit build-up alongside declining interest rates…
Is a person that pays $1,250 a troy ounce today top-ticking the market by entering a crowded trade that has little upside and great downside? We don’t think so. Do your own research.
- Call your investment advisers and ask them what percentage, if any, they recommend investors allocate towards precious metals.
- Ring up prominent friends with substantial portfolios and ask them how much gold they have as a percentage of their portfolios.
- What about your fund managers overseeing, say $50 billion? Are they actually long $2.5 billion to $5 billion in precious metal plays?
Our guess is that the figures…will be very small, say 5% to 10% (if any at all).
Let’s extend this thinking…
- Most mutual and pension funds that report their holdings don’t own any gold – zip – other than very minor positions in precious metal mining stocks and these stocks usually comprise less than 1% of their holdings.
- Hedge funds? Yes, it seems hedge funds have been buying gold but of those that have, most have less than 10% of their holdings in precious metals.
- What about foreign central banks, Middle-East sheiks, Russians, ultra-wealthy families around the world? Yes, we would argue they “get the joke” and have been diversifying their wealth out of their home currencies and fiat currency-denominated assets into this scarcer currency…
Global central banks are trying to keep it all afloat by printing even more money (by making more debt). The response by central banks to declining velocity has been and will continue to be the same as their responses to credit deflation – they will continue to print money.
They may give it to their fractionally reserved banks that may then use the money multiplier to distribute more credit and in turn raise systemic velocity, or they may give it directly to debtors in the hope they will spend like drunken sailors again.
There is enormous embedded inflation already and more to come. The high-powered money has already been created; it is leveragable and it is there to increase velocity. Higher prices must follow.
Will the Fed and other central banks withdraw liquidity? No, never. They never have and they never will regardless of how many tools they proclaim are in their toolbox to do so. If money velocity picks up leading to rising consumer prices, it will also lead to rising market-priced interest rates. They may decide to cut back their monetization, but they will not drain money.
We can look at price inflation contemporaneously or we can throw the ball ahead of the receiver. The result will be the same. The defense is blitzing; Jerry Rice is standing all alone in the end zone; Joe Montana is going to get sacked….but the ball is already in the air.
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article written by Paul Brodsky
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