US NATIONAL DEBT

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A Whiff of Stagflation

July 26, 2013

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital, had the following comments on the current gold market situation and outlook:

It was only a matter of time before gold prices broke through overhead resistance at the technically and psychologically important $1,300 an ounce level.  After all, the market had become increasingly “tight” in recent months with a growing shortage of readily available physical metal.  This could be seen in the hefty price premium investors have willingly paid to take delivery of gold bars (as much as $40 an ounce in Shanghai, for example), the rise in gold loan rates, the modest backwardation in gold futures markets, and reports of refinery backlogs.  

In addition to the market’s internal supply/demand situation, gold prices have been extremely sensitive to U.S. monetary policy prospects – with every statement by Fed Chairman Ben Bernanke and other central bank officials parsed every which way by gold traders and speculators.  In the past few months, expectations that the central bank might soon begin “tapering” its monthly asset purchases (akin to easing up on the monetary gas pedal) weighed heavily on the gold market. 

But last week, Chairman Bernanke’s latest comments led many Fed watchers to now expect no change in the central bank’s program of quantitative easing until sometime next year – and this shift in expectations was quickly reflected in a firmer gold market. 

However, somewhat ironically, it was Japan’s Sunday election results (granting Prime Minister Abe’s ruling coalition in majority in both houses of parliament) that triggered the early Monday morning wave of buying in Asian markets and kicked gold prices smartly through the $1,300 an ounce level.  The election results were interpreted as a popular mandate to continue Japan’s aggressive reflationary policies.

Gold still remains vulnerable – but, day by day, the chances of a significant decline below $1,300 are diminishing and the probability that we are in the initial phase of a major up-leg in the metal’s price is growing.  It may be that gold prices are still in a “bottoming phase” and have more work to do around recent levels before moving substantially higher. 

Although we can enumerate a number of proximate factors contributing to gold’s recent advance back over the $1,300 an ounce level, it is just possible that something more fundamental but less visible is at work.  That something is a whiff of “stagflation.”

Stagflation, a period of low or negative economic growth coupled with high or accelerating price inflation may already be what ails us.  Certainly, you’d think so judging from recently reported economic indicators. 

The 1970s was a decade of stagflation here in the United States and just about everywhere else.  It was the result of financing the Vietnam War and the Great Society via the printing press beginning a few years earlier and then compounded by the 1973 Arab oil embargo and the subsequent sharp increase in global energy prices.  Not surprisingly, it was also a decade of skyrocketing gold prices, with the yellow metal rising from $35 an ounce in 1970 to $850 an ounce in January 1980.

Sounds awfully familiar: Wars in Iraq and Afghanistan, along with high Federal spending on entitlements, all financed by the Fed’s aggressive program of quantitative easing.  And, with instability across much of the Middle East (Egypt’s military coup, Syria’s civil war spilling over into Lebanon, Israel gearing up for a possible attack on Iran’s nuclear facilities, Iraq and Afghanistan deteriorating into lawless states, Arab springs threatening to erupt in one or another of the Gulf states) a disruption of oil supplies to the world market is a real possibility. 

Even without a Middle East oil crisis of one sort or another, recent U.S. consumer and producer price data may be earlier indicators of inflationary pressures in the economy.  After all, the degree of monetary stimulus has been unprecedented. 

The June Consumer Price Index was up by 0.5 percent, thanks to higher gasoline prices and higher costs for clothing, food, housing, and medical care.  The Fed’s preferred inflation indicator, the “core” CPI, which excludes food and energy as if these items don’t count in every family’s budget, was up only 0.2 percent.  So the Fed remains unworried though many households are feeling the pain of higher prices. 

Meanwhile, the Producer Price Index surged for the second straight month, rising by 0.8 percent.  This is the fastest rate of increase since last September – and suggests more price pressures are in the consumer’s pipeline. 

About Rosland Capital

Rosland Capital LLC is a leading precious metal asset firm based in Santa Monica, California that buys, sells, and trades all the popular forms of gold, silver, platinum, palladium and other precious metals. Founded in 2008, Rosland Capital strives to educate the public on the benefits of investing in gold bullion, numismatic gold coins, silver coins, platinum, palladium, and other precious metals. Rosland also helps people who wish to protect their wealth by including a gold or precious metal-backed IRA in their asset portfolio. Click here for more information.

About Jeffrey Nichols

Jeffrey Nichols, Managing Director of American Precious Metals Advisors and Senior Economic Advisor to Rosland Capital, has been a leading precious metals economist for over 25 years. His clients have included central banks, mining companies, national mints, investment funds, trading firms, jewelry manufacturers and others with an interest in precious metals markets.