‘Real’ Inflation Set to Rise; Hedge Your Bets with Gold
The comments below are an edited and abridged synopsis of an article Peter Reagan
Some believe that gold’s performance in the US dollar is not as good as it should be, but even economists who favour the dollar gold price might be blind to an upcoming rise in the financial power of the precious metal.
That, and real inflation may become a better gauge of how well this measuring stick is doing, though revealing it at the federal level may send the market into a panic.
Using the dollar’s strength to measure net worth could give the impression of a strong dollar. But that yardstick shrinks as inflation eats into it. This means using the dollar as a yardstick for measurement isn’t consistent.
As of December 2018, the CPI inflation rate was 1.9%. This is near the Fed’s target rate, but it doesn’t tell the whole story.
Ross Norman of Sharps Pixley says Americans have lost roughly 10% of their wealth each year since 2014. Assuming this is correct, middle-class Americans have lost half their buying power, and inflation is a thief in the night.
Norman also says that gold has offset these losses with an average year-over-year gain of 10%, compounded since 2000. He said this shows that gold is a reliable measure of purchasing power parity. If so, real inflation could steal your wealth if you don’t hedge your bets with gold as insurance.
If you only look at CPI inflation, it has dropped into Powell’s comfort range. But you probably won’t be comfortable, because your standard of living isn’t factored into the calculation.
Enter real inflation, using the methodology used in 1990, which factored a constant standard of living into the calculation. In a Shadow Government Statistics chart, inflation is much higher than the Fed’s version, currently at around 5.5%.
Using the even older methodology from 1980, real inflation gets closer to 9%. Norman calls the result stealth inflation, because it’s not reported by the Fed.
What follows is localized currency weakness. That means the US dollar. After that, gold gets expensive and then it becomes significantly higher in your local currency. By then, it’s too late to get on the lifeboat.
Insurance works best when you buy it before you need it. But if you don’t do your homework, knowing when you need it can be challenging.
If the Fed (or the BLS) revealed the real inflation rate, whether it’s closer to 6% or 10%, the market would likely panic. People would see the dollar’s true buying power, and that could trigger the next financial crisis.
No matter what comfortable story the Fed tells, do your own homework by examining the inflation behind the curtain. And prepare yourself by hedging your bets with physical gold before the train has left Inflation Station.