Last Friday seemed to be just another average ordinary day in the markets. The S&P, Nasdaq, and Russell 2000 each made new all-time highs. The Dow Jones proved to be the disappointment. It only managed a 100 point gain, insufficient for a new record high.
But something else happened, unobserved by many market participants. Gold rose by over $20 per ounce. This significant but mostly overlooked event mattered for a number of reasons. Gold is supposed to move inversely to the stock markets.
This simply means that when stocks are roaring into record high territory, all else being equal the yellow metal will be left out in the cold. This makes sense. If the so-called smart money is feeling confident, why would it chase the ultimate safe haven that provides no yield when it could be instead bagging winning stocks?
The answer is that “all else is not equal.” Something is going on behind the scenes here. You call this mysterious something inflation. Inflation is simply put the point where the costs of goods and services are rising.
You might be asking: how could there be inflation when things are so fantastic in the U.S. economy? Did not the Federal Reserve Chairman Jerome Powell just give his speech at Jackson Hole at the end of last week telling us to be calm, hat everything will be just fine with the U.S. economy and inflation?
What Powell more or less said was that he does not see any serious danger of the American economy overheating. He feels that the chances of inflation exceeding his two percent goal are slim to none. He calls this a “low likelihood.”
Unfortunately for everyone in the U.S., Chairman Powell is either living in a dream world, or he does not like what he knows to be true and refuses to admit it to the nervous investor crowd. In fact, the year on year Consumer Price Index sits at almost three percent right now. Powell may not want to admit that, but the uncomfortable thing about statistics is that they seldom lie.
The markets know this is true. They intuitively felt that inflation is higher than the Fed believes and wants. In essence, they called Mr. Powell’s bluff. Markets were higher for the simple reason that this is one place that smart money tries to hide from rising inflation. Gold is another proven place to hide from inflation. A third is oil. It is no coincidence that oil is closing in on $90 per barrel either.
Powell and company at the Fed fear the mistake of raising interest rates too quickly and too high. They worry that this might choke off the longest bull market run in American history. In reality, they have already committed the unpardonable sin.
Not only did the Fed not raise them quickly enough to beat inflation, but they did the worst thing imaginable. Under Powell’s predecessors Ben Bernanke and Alan Greenspan, they lowered the interest rates too far. Instead of praising Mr. Greenspan, Powell should have been attacking him and Ben Bernanke for dropping interest rates too much and then keeping them so low for way too long.
The long and short of it is this. Jerome Powell and his colleagues at the Fed are not going to try to keep the feared inflation genie in the bottle. They do not believe in a genie that wants to escape. Should the genie get loose, he will do whatever is necessary to force it back into the bottle. Good luck with that Mr. Powell. History has shown us repeatedly that after the inflation genie has escaped from its bottle, it is nearly impossible to get it to go back inside.
If you doubt this for a second, consider the examples of once-promising countries like Venezuela and Argentina. Venezuela used to be the wealthiest country in South America. Argentina around a hundred years ago was as wealthy as the United States at the time! What went wrong in both cases? Among other mistakes they made, they let their inflation genies get loose. They never really got them back into the bottle.
Former U.S. Federal Reserve Chairman Paul Volcker knows all about what it takes to get the proverbial inflation genie back into the bottle. He did this successfully in the U.S. back in the 1970’s, the last time America lost control of its inflation. At the time stagflation was rampant.
Growth had crashed to nothing while inflation ran wild. Volcker proved to be exactly the kind of man America needed at the time in the captain’s chair of the Fed. He made the hard choices, he raised interest rates to over 15 percent in what were massive interest rate increases.
Do not think for one minute that the $21 trillion national debt mountain can stand interest rates of 15 percent, 10 percent, or even a historically normal six percent. Fifteen percent rates amount to over $3 trillion in interest per year, nearly 70 percent of the entire spending of the Federal government for the 2019 fiscal year.
This would all go to pay just the interest on the debt. It would bankrupt the federal government instantly. Even six percent would be $1.26 trillion per 12 months in interest, about as large as annual outlays for Medicare and defense spending today combined.
Is Your Retirement Portfolio Prepared for Stagflation or Massive Inflation?
The Fed lacks the stomach to do “whatever it takes” to force the inflation genie back into the bottle. Not only would this lead to an even worse Global Financial Crisis, it would force the federal government to either massively increase taxes or drastically reduce spending on core programs like Medicare and Social Security. The third choice is to default on the government debt. Given that any of these scenarios would lead to a financial meltdown, you should take steps to protect your retirement portfolio today.
Gold is your historically proven best friend in any of these scenarios. It has saved investors from ruin in times of stagflation, government debt default, and runaway inflation for not hundreds but for thousands of years. Click here today to obtain your no-cost, no-risk gold IRA rollover kit from the globally respected gold retirement firm that earns its own golden reputation every single day — Regal Assets. It will give you the information you need to protect your IRA assets through a partial diversification of your retirement account into physical gold.