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The Fed Is Caught in an Inflation Death Spiral—That’s Bullish for Gold and Silver

edsl48

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This is some of the usual investment porn but I think there are some valid points being raised.Just ignore the sales hype at the end.

One of the most common objections to allocating wealth to gold is that “it doesn’t pay interest.” At the same time, the attractiveness of an asset that can’t be inflated away by government fiat is obvious. This is why the most powerful driver of gold prices over the last 50 years has been real interest rates in the US.



RatesvsGold1970-2021.png




Why real US rates?

Because, as with other commodities, gold prices are quoted in US dollars. This alone gives gold and other commodities a generally inverse relationship with the USD. Indeed, commodities prices are frequently cited as measures of inflation.

But nominal rates don’t account for inflation. A nominal 1% interest rate is actually negative if inflation is 2%. This is why gold and nominal rates can rise together during times of higher inflation.

At the same time, gold is also a monetary metal. It’s a form of physical wealth that competes with the USD directly as money. That can cause both gold and the USD to rally together when economic uncertainty prompts people to seek the safety of cash.

That’s why we can’t look at just the relative strength of the USD in foreign exchange markets to explain gold prices.

There are other complicating factors, like moments of great systemic risk or geopolitical stress (collapses and wars), so there’s no single factor that accounts perfectly for gold prices. But if we look at real rates and real, inflation-adjusted gold prices, we find a very strong inverse relationship. This can be seen more clearly if we zoom in from the long-term chart above to the last 10 years.



RatesvsGold2011-2021.png




On this scale, nominal rates are almost irrelevant, but real rates have a powerfully inverse correlation with real gold prices.

That’s good to know, but as a gold stock speculator, what I really want to know is the likely trajectory of gold prices going forward.

To help us estimate that, let’s zoom in again and look at gold and rates over the last year.



RatesvsGold2020-2021.png




It’s interesting to note that real rates and gold rose together after the crash last March. That’s because CPI inflation fell sharply while nominal rates were held constant—but safe-haven demand drove a lot of money into gold without regard for real rates. No great surprise during exceptional times.

More important for my speculative investment decisions for 2021 is that—as you can see on the right-hand side of the chart—real rates are drifting lower and gold prices have rallied again.

This brings us to the critical question: What will real rates do in 2021?

We already know that the Fed has said that it will keep nominal rates nailed to the floor for years. That makes inflation the key variable, as it will determine the trajectory of real rates while nominal rates remain flat.

Happily for gold bugs—from soaring commodities prices to stock-market bubbles—signs of rising inflation abound.

Even the official CPI is starting to creep up.

Better yet (for gold) is that the Fed not only says it will let inflation run hot for some time, it also won’t see a post-COVID-19 surge in inflation this summer as real and requiring response.

A dramatic decline in real rates this year seems highly probable, and that makes me very bullish on gold.

Silver as well, of course, but silver also has surging industrial demand going for it, so it could have a great year even if I’m completely wrong about real rates.

But wait a minute—haven’t rates been rising over the last month? Isn’t that what knocked gold back below $1,800 recently?

Yes, but remember that the Fed does not—currently—try to control all bond yields (rates). The Fed funds rate hasn’t changed. It’s interest on long bonds that have been rising. The benchmark 10-year T-bill, in particular, is up sharply. People around the world are waking up to the threat of much higher inflation I’ve been warning about since the monetary and fiscal floodgates were jammed wide open last year.

This is “steepening of the yield curve,” presenting the Fed with a serious problem.

They want to keep rates low to help the economy recover. Everything the Fed has said for years, if not decades, makes it clear that maximizing employment is the higher priority of the Fed’s two goals under its dual mandate (full employment and stable prices).

Key Point: higher bond yields draw capital away from the stock market and tend to slow economic growth—the opposite of what the Fed wants.

Something’s gotta give…

If you’ve been reading my work for any length of time, you know I avoid making big bold predictions about the future. In the current situation, however, I just don’t see any way the Fed can avoid intervening in the longer end of the bond market. Some form of “yield curve control” looks baked in the cake.

And how does the Fed control rates? It can’t just set them by fiat. There’s no rate machine on which a dial can be set to a desired number. What the Fed does is enter into the market itself as a participant. It sells bonds to drop their prices and hence increase yields. Or it buys them to push yields down.

In this case, a massive amount of long-bond buying by the Fed could push their yields down, overpowering the market’s natural response to higher inflation, flattening the yield curve…

But where does the Fed get the money to do that?

It creates it out of thin air.

For that, there is a machine. Well, it’s a database now… far more efficient than having to crank up actual printing presses and pay for paper and ink.

Problem solved?

Not so fast. All this money creation has a consequence that is obvious to everyone (except MMT devotees): more inflation. And expectations of more inflation would push bond yields higher, which would force the Fed to buy more bonds to keep rates low, which would increase expectations of even higher inflation…

Looks like an inflationary death spiral to me.

I’m not calling for hyperinflation—though that is possible if the Fed loses control of the situation.

I am highly confident that we’re going to see much higher inflation ahead—even if the economy continues struggling and unemployment remains high.

That means real rates will remain low for years, which is very bullish for gold and silver.

Not only that, but real rates are likely to drop sharply this summer as the post-COVID-19 surge sweeps the world. It remains to be seen if investors will discount this dramatic change in real rates as “not real,” as the Fed says it will do. If not, the response to the strong directional change on real rates should drive gold prices much higher by the end of this year.

This is why I do think gold will not only hit new all-time highs, it’ll hit new all-time highs in real terms—which it did not reach last year.

Lower real rates would boost other commodities as well, but it’s especially and specifically bullish for gold, which is the world’s longest-serving form of wealth preservation.

I expect silver to do even better. It has not yet risen as much as gold and it always outperforms gold by the end of a monetary-metals bull market.

What about Bitcoin and other cryptos? As long as people see them as money, expectations of high inflation could boost them as well. This could change suddenly if cryptos are criminalized—or simply hit by a major panic.

Bottom Line: I think it’s a mistake for traders and investors to see higher long-bond yields as bearish for monetary metals—and that’s an opportunity for those who see the error.

I should remind readers that I don’t speculate on gold and silver bullion. I buy physical bullion as my preferred form of savings. This is prudence backed by thousands of years of history.

As a speculator with cash to deploy in search of large capital gains, it’s the very best gold and silver stocks I’m looking to buy (more of).

Which stocks? Well, that’s what subscribers to The Independent Speculator pay to know. But my outlook, my reasoning, and my general plan for how to play this market—those are yours free of charge.


I sincerely hope they profit you greatly,

1-L-300x275.png

https://independentspeculator.com/t...eath-spiral-thats-bullish-for-gold-and-silver
 

solarion

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Precisely what I believe we will see going forward. The fed will attempt to manipulate longer term debt(10y) to mask the problem, but it won't fool those paying attention...and once it becomes clear to even the simpletons, it'll be game on for PMs. The banksters know all of this, of course, which is precisely why they're talking down(and smashing down paper) gold and silver...while stacking physical hand over fist. Bankers are scum, but they're far from stupid. Watch what they do NOT what they say.

1614872609416.png


My only issue with the article is that it repeatedly makes reference to "real inflation rates", yet the rate of inflation represented by the powers that shouldn't be is a circus sideshow at best, and a blatant lie at worst. The real rate of inflation is 3 - 4 times what the .gov politburo and their bankster stooges claim it is. Do not be fooled, by the propaganda. Anyone that buys things themselves KNOWS that real inflation is significantly higher than the seemingly innocuous, though cumulatively brutal 2% the fed claims to target. They're professional liars plying their trade. Even using the government's own methodology to calculate the rate of real inflation...before they "fixed" it to HIDE it, one can plainly see inflation is many times what we're told.

1614872965035.png

http://www.shadowstats.com/alternate_data/inflation-charts

This means bond yields need to get to multiples of where they are now, to even contend with the rate of REAL inflation, and doing so would blow up the treasury as they attempt to roll over the insane $28t in debt "dollars" they've recklessly stacked. Protect yourselves ladies and gentlemen...convert your fiat funny munny to assets outside the dollar scam. Do it now, before it's too late. Gold has been weak for months, while silver has been carrying the load, but the last few days it is gold, not silver that has been holding the line against banksters smashing their favorite paper metal strawmen in the futures market.

TLDR; Stack yellow, stack white metal, stack both in here. Either will protect you. The ratio favors silver still, but gold is finally waking up imo.
 

solarion

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Please look around you. It's happening right now. Why do you suppose premiums on a typical ounce of physical silver are 120.18% of spot "price"? Silver eagles are 50% over spot! Tell me please the last time premiums were this high? Never is it? They're smashing the metals with their paper fictions, and gobbling up all the physical right now.

1614873903143.png


The federal regime is spending > $8,000,000,000,000 per year while stealing "only $3.46t. ...and they're right now working on a new stimulus bill. Where do you suppose the extra $6 trillion is going to come from? Printing? ...obviously. They'll print, print, and print...all the while lying about it, manipulating the yield curve, and saying everything is swell in the economy. It's not fine...it's not fine at all. They're conducting a controlled demolition of the economies of the West using their plandemic scam and lockdowns as cover.

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Protect yourself with hard assets. They've been able to kick the can down the road for decades, but that time is coming to an end. Nothing has been fixed from 2008. All they did is paper over the problem, bury it in a ditch, bail out the banksters, and tell you everything's fine. It's not fine. Get physical and do so before the masses of brain dead sheeple finally figure out how screwed they are.
 

solarion

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...ah yes, the old tired deflationary boogey man. Just because their funny munny bankster credit derivatives explode on contact with debt repayment or default...like matter and anti-matter, we're all supposed to cheer on the fed's "valiant efforts" to keep the alleged forces of deflation from eating our babies. The fed does this by robbing us of our currency's purchasing power which rewards irresponsible and reckless financial behavior at the expense of the fiscally responsible. It's completely immoral, but we're constantly told it's to save us from the greater evil. BS it is.

Gumbymint crooks always create a boogeyman to scare you with, so that they can then justify robbing you...to protect you.
 

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VIX is going to take a jump, the 10Y is going to continue to push over 1.5% from the way things look.

Physical property in your hands is the only thing that you truly own.

Paper AU, AG, etc don't match what the physical does, the disconnect should wake people up.
 

solarion

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Nope. The fed will dump a mountain of paper on the 10y to contain yields. They cannot allow anything to move freely.

There are no functional price discovery mechanisms anymore.
 

the_shootist

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Please look around you. It's happening right now. Why do you suppose premiums on a typical ounce of physical silver are 120.18% of spot "price"? Silver eagles are 50% over spot! Tell me please the last time premiums were this high? Never is it? They're smashing the metals with their paper fictions, and gobbling up all the physical right now.

View attachment 203500

The federal regime is spending > $8,000,000,000,000 per year while stealing "only $3.46t. ...and they're right now working on a new stimulus bill. Where do you suppose the extra $6 trillion is going to come from? Printing? ...obviously. They'll print, print, and print...all the while lying about it, manipulating the yield curve, and saying everything is swell in the economy. It's not fine...it's not fine at all. They're conducting a controlled demolition of the economies of the West using their plandemic scam and lockdowns as cover.

View attachment 203501

Protect yourself with hard assets. They've been able to kick the can down the road for decades, but that time is coming to an end. Nothing has been fixed from 2008. All they did is paper over the problem, bury it in a ditch, bail out the banksters, and tell you everything's fine. It's not fine. Get physical and do so before the masses of brain dead sheeple finally figure out how screwed they are.
Excellent post! The window of opportunity is closing fast. At some point the physical metal will be impossible to find and it will be too late
 
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solarion

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What could POSSIBLY go wrong?!?

1615076452944.png


Banks considering treasuries risky, resulting in negative rates?!? Gosh, that sounds kinda bad. Would you like to pay someone to borrow something from you?
 

789

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What could POSSIBLY go wrong?!?
Deflation is coming. By December 2021 the dollar will be stronger than it is today (march 2021). Silver goes down to $20.00.
 

chieftain

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Rates aren't going anywhere, the only way to keep the Ponzi scheme going is MOAR DEBT in all forms.
 

solarion

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Deflation is coming. By December 2021 the dollar will be stronger than it is today (march 2021). Silver goes down to $20.00.
So some seem to think. Definitely someone should let people stacking oil and rhodium in on this alleged deflationary wave. Those two particular commodities are on a tear. An ounce of rhodium is $29,250...up 4452% in just the past four years.

The dollar index is a joke...a trick to make everyone believe in the fiat scam. All it takes for the US dollar to "strengthen" according to the USDX is for the zerozone to debase their crap currency a bit faster than the federal reserve. Japan cranks out a few batches of freshly printed yen-cakes a bit faster than the super crooks at the federal reserve can whip up scheisse dollars and voila..."strong dollar".

The guy in charge of water cooling the dollar printing press tells me a price inflation spike is coming. The bags of vomit traitors in the CONgress are printing up stimmy checks for the masses of sheeple right now. No, there'll be waves of inflation + stubbornly high unemployment. ...otherwise known as stagflation.
 

789

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So some seem to think.
Every one of those three predictions is reasonable. The credit bubble that started under Trump could have gone on for a few more years and come to a soft landing. The moneyprinting comitted in 2020 ruined that possibility. The governments in Canada, Europe, United States cannot print up another boat-load in 2021. And where did the printing-press money go in 2020 ? Not a penny for useful purposes. A portion went to people thrown out of work by the governments. A portion went to pensioners and welfare-bums. The majority of this printing-press money went to friends of politicians. Not a bridge, not a factory, not a road. The money went to food stores, beer-stores, dildo-shops, and speculation.

This year that bubble has to give. After the bubble burst, there is always deflation. The people who were made unemployed in 2020 by the governments, will be just as unemployed in 2021. Many will have to default on debts, many bonds will be forfeited.

In 200 years of U.S. history, money panics were always followed by deflation. The purchasing power of money increased.

Since 1873, silver has been on the downhill.
 

solarion

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Since 1873, silver has been on the downhill.
The coinage act wasn't great for silver, but it was still money for another century. Bankers vampire squid *HATE silver, that's true.

The trouble with the deflationists is they never ever have any evidence to support their assertions. Just a bunch of speculations and doomsday predictions. There was a massive wave of defaults in November of 2008, but my currency must have been malfunctioning, because it didn't increase in purchasing power at all. Yours? No?

Suppose that's because the fed papered over the problem...as usual?
 

789

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The coinage act wasn't great for silver, but it was still money for another century.
Oh, I am all for silver as money. But since 1873 the powers are kicking it. Perhaps because silver is the perfect money metal that the money power is so opposed to it.

As to 2008, I get your point. I live in Canada, so my money actually did go up in 2008-09-10; but it wasn't because of deflation.
 

Ebie

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The coinage act wasn't great for silver, but it was still money for another century. Bankers vampire squid *HATE silver, that's true.

The trouble with the deflationists is they never ever have any evidence to support their assertions. Just a bunch of speculations and doomsday predictions. There was a massive wave of defaults in November of 2008, but my currency must have been malfunctioning, because it didn't increase in purchasing power at all. Yours? No?

Suppose that's because the fed papered over the problem...as usual?
Bread will never be $0.05 a loaf.
 

nowon

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New dollars, wonder where those are going to come from ?

It's about to get ugly. SHTF when 10Y blows through 2% and hits 3.
You know, redbacks...or whatever color they pick for the devalued flavor of the greenback... almost a certainty
 

nowon

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Not sure if they confiscate gold, but some people think they might force miners to sell to the govt...
 

solarion

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Since the fed and treasury are kind of a merged corporatocratic frankenbank entity, perhaps they just whip up some funny munny and buy up all the mining shares and pretend they own the mines. Kind of the fascist version of a socialist nationalization campaign. One never knows the lengths goobermint ghouls will go through to hold on to power.
 

plata_oro

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They won't confiscate assuming the gold they have on their books is actually where it says it is. Yeah it's probably been leased out 100's of times over but the ol' saying; possession is 9/10 of the law. I hope it's their because if not their will be a lot of boating accidents.
 

Ebie

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New dollars, wonder where those are going to come from ?

It's about to get ugly. SHTF when 10Y blows through 2% and hits 3.
the new dollars will probably be digital.
They will need a different symbol or expression to prevent confusion, at first.
After 2-3 years they will be probably called dollars again.
(New peso, turns to just peso in 2-3 years)
 

solarion

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When is the 10y going to 3%? Probably no time soon. The fed will go shopping and patch that pesky yield right up. ...uh down.
 

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Depends on how long they can print money out of thin air.

MY WAG, 6-9 months. I may be right, and hopefully I'm wrong.

Fact is we live in a house of cards, with criminals running our country. Look at the amount of currency that is in circulation, and the helicopter money that our government is throwing around. There's something more to this, a lot more. Not sure what it is, but it's coming. Lockdowns, mask mandates, seeing how far they can push the common folk around is a set up for something bigger that society isn't ready for. I have my theories, but I'm not sharing them right now.
 

solarion

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Don't forget their fortress deecee and pretend plots to attack them by militia. The commie douchebags have clearly seen too many movies and can't even come up with an original false flag plot. ...drab unimaginative losers.
 

nowon

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The coordinated takedown of the world economy by the globalists and their reset is being held up by Putin.. brave man who came right out and said nyet to more bankster mafia dominion over his county
 

nowon

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Great interview.. the currency reset part starts at ~18 min
 
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789

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I'm interested in why you say this.
Not exactly de-flation, as deflation used to be. But there is no reason to expect hyper inflation and gold/silver prices going up-and-up-and-up. A century ago when the credit bubble exploded, the per-capita number of units in existence decreased. Today the government printing-press compensates for that.

In 2008, 2009 the government printed up unheard-of amount of money, but it did not produce hyper inflation, although it should have. Why ? Where did that money go ? All that newly printed money replaced the money that went out of existence as result of the bursting of the credit bubble generated by speculators. It re-capitalised banks and speculators. Without that boat-load of printing-press money from the government, there would have been de-flation.

Similarly, the money that the government prints up in 2021 will merely replace the monies that go out of existence as result of corporations and individuals defaulting on their debts.

Without the government's printing-press money there would be deflation; without all those bankruptcies there would be hyper inflation.

As for gold/silver: what happened following the 2008-9 spike ? I expect similar outcome.


==============================
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"There is no security in using a computer to count ballots. A computer is such a flexible thing that what happens between the time when you put the vote in and the time when it comes out can be what any clever individual wants."
 

the_shootist

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solarion

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Not exactly de-flation, as deflation used to be. But there is no reason to expect hyper inflation and gold/silver prices going up-and-up-and-up.
So basically you're saying there'll be deflation...because there's no evidence of hyperinflation?

Please tell me I misunderstood. I dislike the fact that deflationists routinely cite "hyperinflation" as a reason, when they're the only one talking about "hyperinflation". Gold and silver indeed went "up-and-up-and-up", the last time there was stagflation in the US. The only thing arrested the advance of gold and silver(really the decline in the purchasing power of the US dollar), was sky high interest rates. ...specifically 16.63%.

Do you suppose J Powell will be following in the footsteps of Paul Volcker and stand by as US interest rates reach double digits? ...to arrest runaway inflation? Let me ask you this. If Powell does do the prudent thing, as did Volcker, then what do you suppose will happen with the $28t(and rising) mountain of debt the US treasury must continuously service?
 

789

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So basically you're saying
a) there will be no hyper inflation because a lot of money goes out of existence
b) there would be a classical style deflation if the government didn't fire up the printing press

I dont't think he can raise the rediscount rate.

But, yes, we ARE in a death spiral.

(I don't think I am a deflationist; certainly have nothing with those on the internet. I also have low opinion of those who bring up Weimar and the million Mark loaf of bread)
 
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solarion

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Right. If the government didn't/doesn't fire up the printing press. ...but we already know they did do so, and will continue to do so.

As to the currency popping out of existence due to debt default and evil savers paying off loans, well that's absolutely true and does indeed work to offset inflationary forces. Those deflationary forces will not be winning the day however, because the fed won't allow them to do so...anymore than they'll let interest rates rise to a point necessary to entice bond buyers to voluntarily stack bonds.

Instead the government will employ their legitimized monopoly on the application of force to make pensioners/IRA/401k holders stack ever increasing piles of sovereign debt paper which will not then keep up with the real rate of inflation. That rate, which the government will, of course LIE continuously about.

Know what can protect one effectively from this tyrannical thievery? Physical gold, silver, platinum, bitcoin, bullets, beans, liquor, etc.

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Not equities, not bonds, not foreign currency. Precious metals...in your hand.