Gold Price Lagging Inflation / Commodities / Gold and Silver 2022

Gold is lagging theraging inflation unleashed by the Fed’s epic money printing.  Despite leading inflation benchmarksskyrocketing to multi-decade highs, gold prices have barely budged.  Serious inflation initially fuels record-highstock markets, which stunt gold investment demand.  But festering inflation increasingly erodescorporate earnings, hitting stock prices. As stock markets roll over, gold will start reflecting this inflation.

Runaway inflation isincreasingly plaguing the United States, as evident in this week’s majoreconomic releases.  The December ConsumerPrice Index headline number came in up 7.0% year-over-year, its hottest print sinceJune 1982!  That’s a 39.5-year high,despite the CPI being intentionally lowballed by the government to maskinflation.  Fast-rising general prices slashstandards of living, angering American voters.

This latest CPI reportclaimed food and shelter costs only climbed 6.3% and 4.1% over this pastyear.  Is that your experience?  The actual increases in grocery bills,housing, and rent costs have likely soared at triple-to-quadruple those pretendtrajectories.  Leading into this latestCPI release, new research from Bank of America reported food, housing, and rentprices have blasted about 27%, 18%, and 12% higher YoY!

Shelter accounts forabout a third of the CPI, which is held artificially-low through a fictioncalled owners’ equivalent rent.  That is justa survey asking homeowners to guess how much they’d expect to pay torent a house of similar quality!  MostAmericans who aren’t real-estate professionals wouldn’t have a clue on that.  The CPI is full of similar statistical trickeryinstead of using honest hard free-market data on prices.

The December ProducerPrice Index showing wholesale price trends looked even worse, soaring 9.7% YoY!  That was a record high in this current PPIiteration.  Far more inflation is bakedinto the pipeline, as an intermediate-demand PPI subindex rocketed up 24.4%YoY!  These soaring input costs are cuttinginto corporate earnings, and will ultimately be passed along to customers drivingmore price increases.

Government officialsare blaming this crazy inflation on supply-chain snarls, which is pure misdirection.  As legendary American economist MiltonFriedman warned way back in 1963, “Inflation is always and everywhere amonetary phenomenon.”  When moneysupplies are ramped faster than economies’ goods and services, relatively-moremoney competing for relatively-less things to spend it on bids up theirprices.

Central banks directlycontrol money supplies.  In the past 22.3months since March 2020’s pandemic-lockdown stock panic, the Fed has mushroomedits balance sheet an insane 110.8% higher or $4,607b!  By directly monetizing $3,187b of US Treasuriesand $1,243b of mortgage-backed bonds, the Fed has effectively more thandoubled the US-dollar monetary base! Such extreme excess is wildly-unprecedented.

All those trillions ofdollars the Fed conjured out of thin air to buy bonds were quickly spent,injecting that vast deluge of new money into the real economy.  With monetary growth greatly exceedingunderlying economic growth, prices of almost everything are surging to reflect vastoceans of new dollars sloshing around. Except gold’s, history’s premier inflation hedge has largely slept throughthis money-printing orgy.

When the Fed firstredlined its printing presses in that stock panic, gold did surge dramatically powering40.0% higher over the next 4.6 months. But the hugeinvestment-capital inflows fueling that massive upleg left gold extremely-overbought in August2020, so it has mostly been consolidating sideways ever since.  That has created an enormous pennant chart formation on the verge of an imminent forced breakout.

That should spawn amajor new bull-market upleg where gold will start reflecting the more-than-doubledUS-dollar supply.  But for now, gold isreally lagging the Fed’s raging inflation. This chart superimposes real inflation-adjusted gold prices over theyear-over-year changes in the CPI during this metal’s secular bull.  These real gold prices are CPI-calculated,while gold’s gains and losses are shown in nominal terms.

Gold’s current secularbull was born in December 2015, incidentally the day after the Fed launched itslast rate-hike cycle.  Since then goldhas powered 96.2% higher at best over 4.6 years as of August 2020.  That big post-stock-panic upleg catapultedgold to an all-time nominal high of $2,062. But in real inflation-adjusted terms, gold had been much higher the lasttime inflation was so out-of-control four decades earlier.

In this bull’s first 4.2years into February 2020, headline inflation wasn’t an issue.  The monthly CPI report averaged modest 1.9%-YoYgains in that span.  Gold’s usual driverswere responsible for its meanderings then, speculators’ leveraged gold-futures trading and investors’ gold-investment demand.  Thelatter was retarded by US stock markets climbing to record highs in much ofthat time, leaving gold languishing out of favor.

Reported inflation startedcollapsing in March 2020 on governments’ draconian COVID-19 lockdowns and the resultingstock panic.  By a couple months later inMay, CPI inflation had shriveled up to just +0.1% YoY.  Gold averaged $1,719 that month when Fedofficials feared lockdowns would spawn deflation and a full-blown depression.  So to ward that off they had spun up their monetaryprinting presses to lightspeed.

Through March, April,and May that year alone, the Fed monetized $1,635b of US Treasuries shootingits balance sheet 70.7% or $2,939b higher! That epic monetary spewing sowed the seeds for today’s ruinous inflation.  Rather than start removing that extrememonetary excess as the stock markets soared and the economy recovered, the Fedkept the pedal to the metal.  Its balancesheet kept on relentlesslygrowing.

But the CPI didn’treflect that colossal money printing right away, averaging just 1.4%-YoYincreases from June 2020 to March 2021. Economies can only absorb big money-supply changes gradually, so ittakes time for prices to adjust to them. But with the CPI surging 4.2% YoY in April, it was becoming apparent theFed’s record flood of new money was starting to bid prices higher.  Fed officials argued inflation was “transitory”.

Boy were they wrong!  From April to December 2021, even theintentionally-lowballed CPI had headline prints surging 4.2%, 5.0%, 5.4%, 5.4%,5.3%, 5.4%, 6.2%, 6.8%, and 7.0% YoY. This raging inflation is becoming so politically-damaging to thegovernment that drastic measures will soon be taken to hide it.  The Bureau of Labor Statistics responsiblefor the CPI is changing its methodology starting with the next report.

Back at the end ofAugust, the BLS said “Starting in January 2022, weights for the Consumer PriceIndex will be calculated based on consumer expenditure data from 2019-2020.  The BLS considered interventions, but decidedto maintain normal procedures.”  Whateverthis means, there’s no doubt it will lead to lower claimed inflation based on the BLS’s long track record of obscuring inflation rather than reportingit.

But regardless of whatgovernment statisticians claim to keep their political bosses happy, Americansrunning households and businesses know exactly what their own real-world costsare doing.  My wife and I are shocked athow much more money it takes to maintain our family’s standard of living.  I’ve talked with dozens of friends and heardfrom hundreds of subscribers about inflation, and they all feel the same way.

But gold isn’t yet reflectingthis new world with vastly more dollars bidding up prices universally.  In December as even this fake CPI up 7.0% YoYrevealed the hottest price increases since June 1982, gold only averaged $1,792.  In this 19.0-month span where the headlineCPI inflation rate exploded 59.7x higher, monthly-average gold prices merelyedged up 4.3%.  That is terrible performancegiven this monetary backdrop.

Again a couple major factorsexplain gold’s lack of response to this raging inflation so far.  That summer-2020 rocketing to all-time nominalhighs left gold extremely-overbought, so it needed to suffer a normal and healthymajor correction to rebalance sentiment. And the record-high stock markets directly fueled by the Fed’s extrememonetary deluge slayed interest in prudently diversifying stock-heavyportfolios with gold.

But gold’s high consolidationhas run its course with that major breakout imminent, both sentiment andtechnicals call for gold’s next bull upleg to soon start marching.  And these money-printing-levitated stockmarkets trading at dangerousbubble valuations are in a world of hurt as persistent price increases cutinto both corporate earnings and revenues. Gold investment demand will roar back as stock markets weaken.

The great majority ofinvestors today don’t remember how gold really fares in inflationary timesdriven by Fed monetary excesses.  The USeconomy hasn’t faced similar bouts of serious inflation since way back in the1970s to early 1980s.  To be oldenough to be investing then, traders would have to been born by themid-1950s.  So no one under retirementage now has ever experienced anything like today’s inflation!

That includes me, amid-1970s baby.  Thus before assuminggold won’t respond to the Fed’s radically-unprecedented monetary excesses of thelast couple years, it is prudent to see how gold fared the last time inflationran this hot.  So this next chart appliesthis same headline-CPI-YoY and CPI-adjusted-real-gold methodology to the 1970s.  Gold has a long track record of incredibleperformance in inflationary times!

In real-inflation-adjustedterms, gold’s all-time high of $3,046 in today’s dollars came in January 1980.  That capped a gargantuan 10.0-year secularbull where gold skyrocketed up a legendary 2,332.0%!  A major driver of those life-changing gainswas the raging inflation of that time. Note the high correlation between gold price trends and CPI-YoY changesduring that decade.  Gold mostly followedinflation in lockstep.

The 1970s saw two seriousheadline-inflation spikes, the first peaking in December 1974 at a +12.3%-YoYCPI.  That inflation acceleration ran30.0 months, ultimately catapulting the annual CPI increase 4.6x higher.  In monthly-average terms between the CPI’s +2.7%starting month and +12.3% ending month, gold prices soared 196.6% higher.  The yellow metal nearly tripled duringthe 1970s’ first serious inflation!

Gold was certainlyvolatile within that highly-inflationary span, enjoying enormous uplegs followedby big bear-level corrections.  Butoverall gold was a fantastic investment while inflation ravaged stockmarkets.  For comparison between that June1972 CPI trough and December 1974 CPI peak, the flagship S&P 500 US stockindex collapsed 37.9% in monthly-average terms! Gold is the place to be during serious inflation.

While today’s 7% CPIprice increases sound much milder than the mid-1970s 12% ones, realize the CPIdecades ago was more honest.  Bureaucratswere nowhere near as pressured by politicians to fabricate and heavily massage datato make government policies look better. Since the 1970s the CPI has been changed many times, all lowering reportedinflation.  Today’s CPI would be wayhigher with 1970s’ methodologies!

Consider that owners’-equivalent-rentfarce alone.  The third of the current CPIaccounting for shelter is again reported at mere 4.1%-YoY growth.  Various market measures of rents and US-houseprices are showing increases from 12% to 20% YoY.  Around the middle near 16%, that is stillquadruple the BLS’s ludicrous shelter-price claim.  Just 16% shelter alone would catapult today’s overall headline CPI to +11.0% YoY.

Most inflation-studyingeconomists who aren’t employed by Wall Street to pump and rationalize bubble-valuedstock markets agree that real-world inflation today is much higher than the CPI indicates.  OER is just one componentof that lowballing.  Another is medicalexpenses, with the BLS now claiming medical costs have only risen by 2.5% YoY!  Can you imagine medical bills ever not risingan order of magnitude more?

That 1970s secular goldbull actually suffered a multi-year bear as inflation rates backed off in themiddle of that decade.  Gold didn’t startmarching higher again in late 1976 until CPI disinflation stalled.  Then as inflation started surging again, goldwas off to the races in a mighty run that would ultimately climax in a famouspopular speculative mania.  Gold’sgains were enormous as money-printing-driven inflation soared.

The headline CPIstarted up 4.9% YoY in November 1976, but ultimately soared to a soul-crushing 14.8%in March 1980.  The pace of inflation soared3.0x over that long 40.0-month span. That worked wonders for gold investment demand, which fueled enormous322.4% gains in monthly-average gold prices during that serious-inflationary bout!  Gold more than quadrupled the lasttime runaway inflation racked the US!

Already deeply-undervaluedfrom their early-1970s inflationary pummeling, the US stock markets didn’t plungemuch farther.  But in monthly-averageterms from that late-1970s CPI trough to peak, the S&P 500 still only ekedout a 3.5% gain.  Gold was a vastly-superiorinvestment when inflation last ran at super-hot levels similar totoday.  Sooner or later stock investorswill figure that out and diversify their stock-heavy portfolios.

Gold investment now iseffectively zero, so it won’t take much of a reallocation to drive goldprices far higher.  Exiting December, thoseelite S&P 500 stocks averaging a dangerous-bubble 33.6x trailing-twelve-monthprice-to-earnings ratio had a collective market capitalization of$43,000.3b.  Meanwhile the combinedholdings of the dominant GLD and IAU gold exchange-traded funds were worth just$85.5b.

This proxy of American stockinvestors’ percentage allocation to gold was vanishingly-small under 0.2%.  For centuries 5% to 10% in gold was consideredthe minimum prudent amount, because gold tends to rally when stock marketsweaken.  If Americans even diversifyenough to bring this allocation measure up to 2.0%, that huge demand will catapultgold way higher.  Gold has lots ofroom to run in its current small bull.

Again up 96.2% at best,that’s only about 1/24th the size of the 1970s’ inflationary super-bull.  Since the gold market is vastly larger today,we aren’t going to see 2,300%+ gains again. But 200% to 300% isn’t a stretch at all given the Fed’s epic monetarydeluge in recent years.  This raginginflation will persist until the Fed hikes its federal-funds rate way aboveCPI inflation rates or drastically shrinks its bloated balance sheet.

Neither is going to happen,because either would crash these bubble-valued stock markets.  At the latest FOMC meeting, Fed officialsforecast three quarter-point hikes each in both 2022 and 2023.  That would take the federal-funds rate to1.5% by the end of next year.  That won’teven faze serious inflation.  During thoseDecember 1974 and March 1980 peak-CPI-inflation months, the FFR averaged 8.7%and 17.2%!

And that $4,607b ofquantitative-easing money printing since March 2020 isn’t going to be meaningfullyunwound no matter how toughFed officials talk.  It’s no coincidencethe S&P 500’s 114.4% gain at best since then closely matches that epic 110.8%balance-sheet expansion.  While the Fedmight find the courage to dabble in quantitative tightening, it wouldwreak havoc on these QE-levitated bubble stock markets.

If the Fed can’t fight thisraging inflation it unleashed without spawning a brutal stock bear that wouldat least maul stock prices in half, it won’t. That means interest rates will stay abnormally-low and the Fed’s balancesheet will remain grotesquely-bloated, allowing this inflation to fester foryears.  That is really bearish forstock markets and super-bullish for gold. Make no mistake, gold won’t keep lagging inflation for long!

The biggestbeneficiaries of much-higher gold prices ahead are the fundamentally-superior mid-tier and junior gold stocks.  They rallied sharply with gold into mid-November,but were dragged back down to their stop losses by another bout of heavygold-futures selling.  Our stoppingsaveraged out to neutral, fully recovering our capital.  So we’ve been aggressively redeploying buyingback in low in our newsletters.

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The bottom line is goldis only lagging inflation temporarily. Fed-levitated record-high stock markets have retarded gold investmentdemand, while the yellow metal consolidated high after massive mid-2020 gains.  But this serious inflation will increasinglyerode corporate earnings, forcing bubble-valued stock prices much lower.  And gold is nearing a major forced breakoutfrom a gigantic bullish technical chart formation.

So gold prices should soonstart reflecting this raging inflation unleashed by the Fed’s extreme monetaryexcesses.  Gold soared by multiples duringthe last serious-inflation bouts in the 1970s as stock investors diversified intoit.  And since the Fed can’t hike rateshigh enough to fight today’s inflation without crashing these bubble-valuedstock markets, high-and-rising prices are likely to continue festering foryears to come.

Adam Hamilton, CPA

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