Sign Of The Times: Gold Has Its Most Vocal Proponents Helping Sell Jay Powell’s Fiction

Gold at $1800 an ounce has a lot of people you wouldn’t expect lining up in Jay Powell’s camp. What else could it be, right? Bullion is an inflation hedge, that’s what everyone says. Therefore, quite obviously, skyrocketing gold must indicate the dollar destruction gold aficionados are always predicting.

Unbeknownst to them, and likely to agitate the hell out of them when they figure this out, they are actually doing the Fed a favor. Powell is trying very hard right now to push up inflation expectations so as to ward off the deflationary circumstances we’ve already experienced. He’s flooded the Fed’s balance sheet with bank reserves from buying trillions in assets in order to accomplish this.

That’s massive money printing, they say. Therefore, guaranteed inflation. And by “they” I mean both Fed officials and goldbugs together.

But while the Fed has flooded its balance sheet, that doesn’t actually mean much in the financial system nor the real economy. The bond market, as I keep pointing out, refuses to get onboard simply because we’ve seen all this crap before. We’ve been bombarded with inflationary predictions since before the first US QE was executed, while the plan was still being written up.

No dice. Never happened. Inflation not only failed to materialize, the major inflation indices would fall into a prolonged slumber lasting just about five years. So much for the first round of massive “money printing.”

In terms of gold, however, a rising price actually has less to do with inflation (or falling dollar, if you like) than you’ve been told. Historically, gold has been a very poor inflation hedge. That’s not really why gold is bid, as I described during last August’s deflationary “recession scare” which really was a whole lot more serious than a scare:

In other words, even on the inflation side we have to qualify gold’s value as a hedge. It doesn’t protect against inflation shifting from one moderate level to another; say, from around 1% to 2%. Or even 3% and 4%. As is clear on the chart above, gold skyrocketed when inflation was pitching double digits – meaning an economic situation that had gotten way out of hand despite the “best” efforts of officials.

It wasn’t protection against the accumulation of small errors, it was in demand for the probability of the big one. And in the late seventies, even Congress had figured out that central bankers and Economists had no idea what they were doing. That’s when gold soared; when it was obvious to everyone but central bankers that central banks were failing.

This holds true even in the first decade of the 21st century; the last some Economists still associate with the Great “Moderation.” To most people, there was nothing moderate at all about the middle oughts, in particular. And that’s just when gold popped.

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Laurent Eliane 3 weeks ago Member's comment

A point in favor of gold, even if you have inflation....

Inflation much higher than TB rate or savings rate. If you have 10 percent inflation and 4 percent on your saving, what is your choice?

And as ghost business or government don't have enough money for paying higher interest, you can make the dot for the future.

William K. 3 weeks ago Member's comment

This is an interesting concept indeed. I have thought that gold rises because of a loss of confidence rather than because of actual inflation. And certainly the activities of the Fed promote a loss of confidence in their thinking for the long term.

And the fact that inflation is not instant does tend to produce a disconnect in the association between cause and effect.