Since the COVID induced lockdown compelled every central bank and its brethren to print money ad hoc, one phrase has been constantly fed to the market, "Inflation is transitory". Of course, if a balance sheet of over $4.5 trillion did not produce any sort of inflation over the past decade, then why should another $4 trillion do so? The honest answer is that this new generation of central bankers has only one solution to any crisis, just keep printing.
This is synonymous with the new generation of traders that this cycle has bred that know only one strategy, to buy the dip. Of course, we can go on and on about modern monetary theory as up till now it has proved correct and challenged the basics of economics. But how long can this last?
There is no doubt that there is secular deflation from the growth in Technology, artificial intelligence, etc. China has for years been exporting deflation to us, but since COVID something snapped. Due to supply, China bottlenecks, and countries becoming more protectionist, the global cycle of deflation has come to an end. Of course, the $30 trillion of stimulus has aided this surge as the pent up demand shot up in a short period of time stressing the infrastructure and grid so to speak regarding energy specifically.
This is causing a surge of 200%+ in commodities like gas and coal that have to be produced and stored ahead of key seasonal periods. Just going to your local supermarket one needs to compare their grocery bill from a few months ago and see just how much inflation is apparent. This comes down to the bottom line and disposable income. And this is finally showing up in the data as well now. U.S. CPI for September just came in at +5.4% vs. 5.3% expected, but the core CPI is up 4% year over year! This "core" is excluding food and energy, but should that really be excluded as the spikes in food and energy are not really a one off, nor is the increase in rent and shelter inflation.
The Fed can take as many components out to massage the number to suit their narrative. The real issue is that they don't know and are just hoping that "inflation is transitory". The other question one should be asking the Fed is what time frame does that word encapsulate. Transitory for three months and one year is an entirely different proposition and very different choice of asset allocation. For weeks now the market has been chasing all commodities that have an inflation angle or hedge rather. All except gold and its step sister silver. Precious metals are the ultimate hedge against inflation, especially gold. So then why has it lagged so much or not generated any interest?
The thing with gold is that it is not only a commodity, it is also a macro risk asset. It plays two roles and gets kicked from time to time when real yields rally or the dollar breaks out. All these factors play a role in leaning over the commodity's true function as its macro flows are as important as its micro ones. There is no shortage of gold, but one of the true drivers of gold is its implicit inflation function. We have seen breakeven inflation rates surge higher. Even the market is now pricing in a rate hike in September 2022... against the Fed's better judgement. The 2s vs. the 30s saw bear flattening today as the back end of the bond curve is surely pricing in a Fed policy error.
After reaching highs last August, gold and silver have been extremely boring. Today they are showing signs of waking up. Could this time be different? Has the world finally woken up to the fact that the paper market games are not indicative of the true tightness in the physical market? Most prefer chasing more racy alternatives like Bitcoin and have given up on gold. But in times of real stress, it's a hard asset safe haven that should theoretically outperform every asset class, especially equities in an inflationary world. The problem is people have gotten so used to chasing 100%+ returns, they have forgotten about real wealth preservation.
