Gold is breaking out as investors fear Fed is losing control of inflation - Sprott's Peter Grosskopf
(Kitco News) -Gold prices continue their upward climb, ending five months of consolidation after inflation pressure rose to their highest level in 31 years. According to Sprott CEO Peter Grosskopf, the precious metal is back on its way to all-time highs.
In a telephone interview with Kitco News, Grosskopf said that Wednesday 's inflation data, showing annual inflation rising 6.2%, didn 't add any new information regarding the state of the U.S. economy. He noted that consumers have seen the purchasing power of their fiat currencies decline for decades.
"The most recent federal government budget depends on enjoying record low interest rates while robust inflation spurs growth and helps to boost receipts, all for an extended period of time. This is effectively a policy of financial repression".
However, while most people have been dealing with rising prices for years, Grosskopf said that these latest numbers raised fears that the pace of inflation is running well beyond targeted rates.
Grosskopf said that these concerns are also being reflected in bond markets. He noted that the five-year vs. ten-year breakeven rate - the gap between nominal bond yields and Treasury Inflation-Protected Securities - are seeing their deepest inversion in recent history. Plummeting real rates have helped power gold.
Grosskopf said that inflation appears to be spiraling out of control as normal demand and supply economics are altered by government support. He explained that government interest rate control, spending, new social programs, and fallout from the pandemic had thrown fundamentals out of balance.
"Governments have put their fingers in so many different markets in so many different ways," he said. "This has interfered with the pricing of capital markets and risk, and we are now seeing this on Main Street as well."
Grosskopf said that this fear of out-of-control inflation is also reflected in bond markets. He noted that breakeven rates, the gap between nominal bond yields and Treasury Inflation-Protected Securities are seeing their deepest inversion in recent history between five-year and 10-year notes.
Following Wednesday 's inflation data, U.S. real rates dropped to a new record low.
"This tells us that the market is losing faith in the Fed 's ability to control inflation at their desired level," he said.
Grosskopf said that investors are also scared that the Fed won 't tame inflation because they don 't have the right tool or the ability to use them. Many economists have noted that inflation is being driven by global supply issues, which interest rate hikes can 't impact.
At the same time, Grosskopf noted that because the U.S. has taken on so much debt during the pandemic, any material rise in interest rates would significantly impact its budget.
"Not only are your budgets much more out of whack but even more importantly, now the economy is linked to the market. If the Federal Reserve tightens too much and the market bubble pops, that will directly impact the economy," he said. "The Fed has no good options."
With no good options, Grosskopf said that investors are looking to find their market insurance outside of fiat currencies and turn to gold.
"People are once again realizing that the long-term track record of gold as a wealth protector is uncontested," he said.
By Neils ChristensenFor Kitco News
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