In late 2017 we reported: Here’s How Inflation Could Surprise Everyone. Just lately we are starting to see a few more warnings of a possible rise in inflation.
Zerohedge recently published a great post on how the velocity of money may be bottoming out. Monetary velocity is a key factor in rising inflation levels.
Stewart Thomson outlines below what new government policies are likely to also lead to higher inflation rates. Also what the Trump government may be forced to do were inflation to surge….
Gold: The Ultimate Iron Lady
By Stewart Thomson – Graceland Updates
The appointment of Jerome Powell as new Fed chair is likely the catalyst that ushers in a multi-decade era of rising inflation and soaring gold stocks.
I’ve announced a long term target for GDX of $15,000. That really isn’t very high… given the strong inflation numbers that I am projecting for America in the years ahead.
Having said that, Powell has only been on the job for one day. Investors need to show patience. Wait to see what he actually does before taking “back up the truck” market actions.
Powell’s first significant actions are likely to be announced at the March 21 Fed meeting. I expect a firm commitment to more rate hikes and more quantitative tightening.
That’s inflationary because it boosts bank profit margins and they become more willing to take lending risk. That produces a rise in the velocity of money.
As the cost of borrowing rises, companies will raise prices and workers will demand higher wages. If Powell also makes a firm commitment to deregulating America’s thousands of small banks on or before March 21, inflation would accelerate even more rapidly.
It’s my contention that wage inflation of 20%+ is not just theoretically possibly, but morally justified.
For many years, global governments have colluded with central banks to run socialist/fascist QE programs. These programs moved money from workers and savers to government bonds and stock markets. Additional money was simply printed and taken.
QT, higher rates, and small bank deregulation are beginning to re-empower Main Street. This is happening while “Government Street” (the bond market and the dollar) and Wall Street risk disintegrating.
This is the exciting bond market chart. A head and shoulders top pattern is in play. The neckline has been crushed.
Around the world, governments are announcing import duties. That’s inflationary. If India’s government had cut the gold import duty, it would have increased demand, but the duty itself is also inflationary.
Institutional money managers are starting to focus on the inflationary implications of Trump’s tax cuts that I highlighted when he first proposed them. In the context of QT, rate hikes, and deregulation, these cuts can increase inflation quite significantly.
The bond market is building what I have dubbed a “super top” pattern. The target of the super top is about 80.
The Fed has projected that rates will take many years to reach “normal” levels. This chart suggests the normalization process will take about seven more years.
This “normalization” sounds great in theory. In the real world, it involves a decline to 80 for the T-bond price. That would drive borrowing costs for the US government to incredibly painful levels.
In addition, rates could rise much more quickly than this chart suggests if Trump ordered T-bond creditors to take a haircut on what they are owed. That’s one of his campaign promises.
As inflation surges, Trump may be forced to devalue the dollar and revalue gold to prevent the US government from imploding or becoming a full dictatorship. Inflate, default, or die. In the near -immediate future, these are the only choices President Trump will have to manage the US government’s horrific size, power, and debt.
The dollar could go into free fall if it breaks cleanly under 108 against the yen, and the bear flag chart action suggests that is going to happen very soon.
A breakdown would almost certainly correlate with a gold price surge to about $1370. This is the daily gold chart.
There is a small head and shoulders top pattern in play that could push gold modestly lower to the $1310 – $1290 area. The good news is that a bull flag-like pattern is also forming that could negate the top pattern.
Given the fast-growing inflationary fundamentals, gold investors should now be walking the price gridlines with maximum confidence. Fresh buying for eager gamblers and investors should be done at key levels that I’ve noted on the chart.
Gold has been rising as the T-bond has fallen hard, and rising as the T-bond has rallied. That’s because gold price discovery for the fear trade is not about rates per se, but about risk. As stock and bond market investors get rocked hard, gold looks like the ultimate asset iron lady!
A major gold stocks versus gold bull era will occur as the T-bond super top ushers in extraordinarily high inflation for the long term.
Gold stock enthusiasts need to watch Powell’s actions, because they are the catalysts that will push GDX above $26 and officially begin that fabulous era. Gamblers can buy call options on a two-day close over $26. I’ve urged long term investors to be aggressive buyers in my $23 – $18 tactical accumulation zone. The bottom line is that it’s the cusp of a new era for gold stock investors, and Powell officially launches it on March 21!
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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
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About the Author
Stewart Thomson is president of Graceland Investment Management (Cayman) Ltd. Stewart was a very good English literature student, which helped him develop a unique way of communicating his investment ideas. He developed the “PGEN”, which is a unique capital allocation program. It is designed to allow investors of any size to mimic the action of the banks. Stewart owns GU Trader, which is a unique gold futures/ETF trading service, which closes out all trades by 5pm each day. High net worth individuals around the world follow Stewart on a daily basis. Website: www.gracelandupdates.com.