Brace Yourself for the Next Massive Inflation Surge

Brace Yourself for the Next Massive Inflation Surge
Photo by Kevin Carden

From Peter Reagan at Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: The surprising motives behind inflation, unpacking central bank gold buying figures for 2023, and Turkey is becoming the world’s top consumer of gold out of necessity.

If inflation is bad, why do we have an inflation goal?

Egon von Greyerz recently analyzed the state of economic affairs. From gold to climate, a lot of the points he raises are striking, yet not likely to be covered by any mainstream outlet. His discussion of inflation, or rather its source, caught my eye.

We know the Federal Reserve has an inflation target of 2% annually. In recent years, they’ve missed that target consistently (from 390% over to today’s mere 60% over target). Inflation has been so high for so long that even getting back to 2% feels like victory.

von Greyerz addresses the elephant in the room: Why is the inflation rate not 0%? We should also address the most frightening of boogeymen, too… Why is deflation so terrifying?

First, you must understand that a 2% inflation target is a recipe for deliberate, sustained wealth destruction. So you’d think there would be a very compelling reason behind it! Yet when asked this very question recently in a Senate hearing, Fed Chair Jerome Powell said:

The 2% is globally agreed between all major central banks as a target.

When asked how that is beneficial to the people, Powell went on to reveal the true depths of the Federal Reserve’s policy:

I will tell you how it does, I guess it is obviously not obvious how that is… To have people believe that it will go back to 2% anchors inflation there.

Let me translate the Chairman’s responses into English:

  • 2% inflation is our target because it’s everyone else’s target
  • There’s no actual benefit to 2% inflation beyond expectations

If this doesn’t make you question the competence of those involved in managing your money, then nothing will.

Since understanding the alleged benefits of 2% inflation is “obviously not obvious,” here’s a brief Q&A:

What causes inflation?

An increase in the supply of currency – which, by itself, decreases the currency’s purchasing power. Rising prices are a symptom of inflation rather than inflation itself.

Is inflation going down?

No, but recently inflation is going up less quickly. Remember, inflation is cumulative. After a year of 9% inflation, your currency has lost 9% of its purchasing power permanently. Even if inflation drops to 0%, that lost 9% is gone forever.

How does raising interest rates help inflation?

Higher interest rates make borrowing more expensive and encourage saving rather than spending. Less credit and more saving decreases overall economic activity by reducing the amount of currency chasing goods and services. Higher interest rates don’t, by themselves, reduce the overall supply of currency, but they do discourage spending.

Why is deflation bad?

Deflation is literally a reduction in the circulating currency supply – which increases the purchasing power of the currency. That may not sound bad to you (unless you have a lot of debt). Deflation encourages saving money, which lowers overall economic activity. Worse, though, deflation forces debtors to use more valuable currency to repay their creditors. The more you owe, the worse deflation is for you – and if you owe, say, $32 trillion, it’s a recipe for disaster… Just as inflation encourages borrowing and spending, deflation encourages the opposite.

To continue: von Greyerz believes the world is turning away from IOU-based currencies. The reason for this is straightforward: the debt is simply becoming unsustainable, and it gets worse the higher up we go from the average citizen to governments themselves. One might say that the world’s credit score is becoming insufficient to support the current, debt-based global economy.

This is a key reason BRICS nations are interested in creating a commodity-backed currency. A commodity has intrinsic value – it’s desirable because of the thing itself, rather than because of a promise from a government. In this way, von Greyerz also inadvertently explains why BRICS economies want to rule the world all of a sudden. In a shift away from unbacked paper money and towards tangible assets, these global commodities exporters are real economic powerhouses.

The transition away from unbacked, debt-based liability currency to commodities-backed money won’t be easy. Expect a decade of high inflation, high interest rates, geopolitical turbulence and economic volatility. To navigate this “new normal,” von Greyerz recommends physical gold and silver (as well as a few industrial commodities) as the only assets likely to endure the chaotic decade ahead.

Central bank gold buying still up (if we exclude profit-taking)

Central bank gold demand down 39% vs. last year? Such a claim merits scrutiny.

On the heels of a record year (central banks bought 1,136 tons of gold in 2022), why the sudden about-face?

As IMF data reveals, three countries are responsible for the sell-off: Turkey, Kazakhstan and Uzbekistan.

Turkey was the largest gold buyer last year with over 125 tons, but has reportedly sold 59 tons in the first five months of this year. Turkey’s case has already been covered in full. The nation is selling gold bullion to prop up its currency. The results, so far, have been mixed.

Kazakhstan and Uzbekistan’s cases are less clear, with the former having sold 35 tons and the later 27 tons of gold. Notably, unlike Turkey, they were also net sellers last year. Both nations have large gold reserves (#15 and #17 largest) in relation to their economies. I suspect the motive is simply profit-taking.

Who are the buyers, then? Singapore bought 69 tons and China 68 tons during the period. We’ve covered in reasonable depth how China’s gold-buying reports appear to be a message to the world. It has been suspected for the longest time that China’s real holdings far exceed the reported figure, and that the country isn’t particularly concerned with reporting its gold purchases to the public.

This narrative is especially strengthened when one takes into account that most of the 1,136 tons were from countries unrevealed, with China being one of the few willing to disclose its central bank policy. Singapore has retained a similar air of secrecy – any attempt to get an explanation from its central bank was met with vague or secretive responses.

Not the case with Poland, this year’s third-largest gold buyer (and world’s #22 largest gold reserve). Sharing borders with Ukraine and Belarus, I’m personally not at all surprised to see Poland adding more gold to its reserves.

In times of geopolitical uncertainty, gold as always serves as the ultimate form of payment or collateral. Let’s hope the Ukraine conflict doesn’t spread to Poland – but if it does, the nation will, at least, have taken steps to diversify its savings with a heavy allocation to gold as insurance against crisis.

The collapse of the lira and Turkey’s massive consumer gold demand

It feels like any story of Turkish gold selling should be accompanied by the full economic picture. For example, the 165 tons of gold sold by the country within three months were actually sold to Turkish citizens. This was necessary to meet local demand as the country banned gold imports amid trade disagreements with the European Union.

Surprising, isn’t it? The biggest central bank gold seller this year has sold its gold reserves to its own citizens!

But there’s quite a bit more to the story of Turkey’s economic weirdness. Erdogan seems determined to play Russian roulette with Turkey’s economy. Instead of raising interest rates to fight rising prices, he has instead lowered them. Turkey currently misses the technical definition of hyperinflation by a whisker, after enduring 50% or higher monthly price increases for all of 2022. The most recent report puts inflation at a blistering 48% monthly.

Economic insanity aside, the earthquake in Turkey reminded us of something that doesn’t get mentioned often enough in the gold market: Gold and real estate are both tangible assets, but they aren’t the same. The latter comes with so much risk, including counterparty and environmental, that it can’t be classified with gold. Both are tangible assets with intrinsic value – beyond that, they’re completely different.

Unsurprisingly, Turkish citizens loaded up on gold bars and gold coins. (Unlike gold jewelry, these are classified as “gold for investment.”) In fact, the world’s 19th largest economy accounted for 1/3 of global demand for investment gold in the second quarter of the year.

The Turkish people are suffering economically – but fortunately, they’re spending their money as quickly as they can to secure a lasting store of value with gold.

2023, central banks, Featured, gold demand, inflation