Central banks at a crossroads and any move to deal with rising inflation will only be cosmetic - Degussa
(Kitco News) - Central banks are at a perilous crossroads as they must deal withrising inflation pressures and make sure that the global economy remains strong.
In a recent report, Thorsten Polleit, chief economist at Degussa,said that it's only a matter of time before investors turn back to gold ascentral banks try to walk a precarious line between economic growth andinflation.
"The exchange value of gold and silver cannot be permanentlymanipulated downwards by central banks, especially not when times get reallyhard. What is more, physical gold and silver do not - in contrast to bankdeposits - carry a counterparty or default risk. Last but not least, physicalgold and silver make the investor independent from the financial system, itstrading hours, settlement and delivery procedures and costs," he said inthe report.
For most of 2021, investors have avoided the gold market ascentral banks, led by the Federal Reserve, look to shift their monetarypolicies. The Federal Reserve is looking to reduce its monthly bond purchasesbefore the end of the year. Markets also see the potential for the U.S. centralbank to raise interest rates before the second half of next year.
These hawkish expectations are keeping gold prices trapped below$1,800 an ounce.
However, Polleit said that investors are starting to realize thatthe Federal Reserve has itself been trapped by its monetary policy. Heexplained that any meaningful tightening could prove to be disastrous for theeconomy and financial markets.
"It should be clear that a monetary policy of interest ratehikes and containment of credit and money supply expansion would be tantamountto an earthquake for the global economic and financial system - because thelatest economic recovery has been driven by extremely low interest rates and amost generous supply of credit and money," he said. "If central banksmeant business and were to combat price inflation by raising interest ratesback to 'normal levels,' a recession-depression would be inevitable."
Polleit said that he expects any central bank tightening to be"cosmetic" in nature and that real interest rates are unlikely to seea material rise from their recent historical lows.
"Global debt levels are already crushingly high, and manyborrowers could not survive in an environment of higher real borrowingcosts," he said.
In the current environment, Polliet said that when it comes torising pressure pressures, the best investors can hope for is that it doesn'tspiral out of control.
Global debt levels are already crushingly high, and manyborrowers could not survive in an environment of higher real borrowing costs.
"Adding physical gold and silver to your portfolio atcurrent prices makes perfect sense to those long-term oriented investors whoshare the view that central banking has actually arrived at a crossroads - andthose who believe that the most likely scenario is the inflationary regimecontinuing to push its limits," he said.
By Neils ChristensenFor Kitco News
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