Nick Barisheff of BMG Group Inc. says this is the perfect time to allocate to gold based on all the factors and data during this “perfect storm for gold”.
In December 1997, the Financial Times ran an article entitled “The Death of Gold”. Since then, the gold price in US dollars has increased 519 per cent, from US$288 to US$1,780. Today, after many political events and crises we have evidence of the continuous, and in many ways spectacular, growth of the price of gold. This confluence of many current events is creating a perfect storm for gold to increase dramatically more than we imagined.
Typically, currency devaluation is always at the heart of a rising gold price. This has been taking place in all of the major fiat currencies, resulting in an average annual price increase in gold of more than 10 per cent since 2000. Since 1900, all major fiat currencies have been devalued by more than 90 per cent.
To understand currency devaluation, it is necessary to understand that all currency is created by governments issuing debt and then the central bank monetizing that debt by printing the currency.
In 1960, the US federal debt to GDP stood at 52.2 per cent, whereas today it has grown to 125.9 per cent. The Federal Reserve has increased its balance sheet by a historically unprecedented amount of over US$7.5 trillion since 2008. Because of this central bank policy, all western currencies are being devalued and this in turn leads to inflation.
Price inflation follows
As currencies are devalued, price inflation will inevitably follow. Inflation, a term that has always been used everywhere and especially in North America, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to cheque. But people today use the term “inflation” to refer to the phenomenon that is an inevitable consequence of inflation, and that is the tendency of all prices and wages to rise.
In October 2021, consumer inflation jumped to a four-decade high, the highest since the days of runaway inflation in the early 1980s. Headline year-to-year GDP inflation hit a 38-year-plus high of 4.53 per cent.
According to John Williams of Shadowstats.com, if inflation were calculated using 1980s methodology, the consumer price index (CPI) would be nearly 15 per cent. Since treasury yields are about two per cent, the true inflation-adjusted treasury yield would be about -13 per cent.
Inflation is destined to go even higher in 2022. Many of the biggest corporations have already announced price increases that will take effect in 2022.
Declining GDP and stagflation
Stagflation is worse than a recession. This is because stagflation combines the bad economic effects of a recession (stock declines, unemployment increases, housing market dips) with inflated prices. When this is dragged out over the long term, it becomes a problem that can have a big impact on societal habits.
To make matters worse, we are already experiencing declining GDP together with increasing inflation. This is due to an unusual combination of supply chain disruptions and labour shortages due to COVID-19 policies that have been implemented in most western countries.
Supply chain disruptions
The COVID-19 pandemic impact and the disruptive government responses continue to have enormous negative impacts on global supply chains. Beyond COVID-19, compounding profound governance incompetence, media bias, political conflicts, disintegration of society split by ‘COVID politics’, natural disasters, cybersecurity breaches and international trade disputes have all negatively impacted supply chains, leading to product shortages, distribution delays and manufacturing disruptions.
The lockdowns imposed in many countries have led to revenue declines and many bankruptcies, with many more to come. Making matters even worse is the implementation of vaccine mandates, causing more than 4 million people to leave the workforce in the US. This will lead to other societal problems due to lack of first responders, nurses, firefighters, and police officers.
Some analysts expect that it will take years for the capacity constraints and backlogs to ease.
How can the US economy be recovered minimally, with October 2021 payroll employment still 2.8 per cent shy of recovering its pre-pandemic (and pre-recession) peak? Except for the severe recessions in 1981 and 2007, and despite being well off bottom, the current pandemic-driven payroll shortfall remains deeper than anything seen at the troughs of the other six US recessions all the way back to 1957.
Even with unemployment well above pre-pandemic levels, there is also pressure on wages, resulting in companies having to pass on additional wage costs. We have the beginning of a wage price spiral.
The Tax Foundation estimates that the Democrats’ new welfare bill will destroy 103,000 jobs over the next 10 years. Many of these job losses are due to tax increases, increased regulatory burdens and energy inefficiency introduced by the Green New Deal.
The job losses projected by the Tax Foundation are in addition to hundreds of thousands of job losses facing the economy in the short run because of vaccine mandates and the firing of employees who refuse to get vaccinated. In the US, 4.4 million people have already quit their jobs due to vaccine mandates.
The Misery Index
Since the launch of the fiat money era in the early 1970s, economies have gone very wrong, and unemployment and inflation rates have skyrocketed. Campaigning in the late 1970s, then-presidential candidate Ronald Reagan added the two numbers together and famously named the result the Misery Index. Subsequently, the Misery Index became the bellwether for stagflation—the combination of economic stagnation and runaway inflation.
The Misery Index (sometimes known as the Economic Discomfort Index, or EDI) is simply the sum of the inflation rate plus the unemployment rate. The higher the combined score, the worse the economic situation.
Overvalued equity markets
To add even more cause for concern, the US equity markets are more overvalued than during the financial crisis of 2008 and, depending on the methodology, may be more overvalued than during the dot-com bubble in 1999 and even the 1929 crash. Although some of the excess money supply has resulted in consumer price increases, much of it has gone into the equity markets and real estate.
According to the Case Shiller National Home Price Index, home values are 38 per cent higher than during the 2008 market crash.
Gold in US dollars has been the best stagflation performer since 1973. The combined effects of currency devaluation, inflation, and declining GDP, plus overvalued equity and residential real estate, creates a perfect storm for dramatically increasing precious metals prices in the future.
Every portfolio should have at least 20 per cent allocated to bullion in order to preserve wealth, improve returns and reduce portfolio volatility. Investors need to consider that if they lose 50 per cent of their portfolio, they will need to achieve gains of 100 per cent just to break even. Although prices still may go up, it would be prudent to sit out the next few months in cash or gold. That will provide investors with the opportunity to reinvest in their favourite assets at considerable discounts at the bottom.
This is the perfect time to allocate to gold based on all the factors and data during this “perfect storm for gold”.
Nick Barisheff is president and CEO of BMG Group Inc., which offers investors the means to purchase and store physical precious metals bullion. BMG’s head office is in Toronto.
This is an edited version of an article that was originally published for subscribers in the January 21, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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