Why Inflation Is about to Get A Whole Lot Worse
The comments below are an edited and abridged synopsis of an article by Phoenix Capital Research
Because we are in a fiat-based monetary regime, gold trades like any other asset. It typically tracks real rates or the actual cost of money as in the difference between yields on Treasury Inflation-Protected Securities (TIPS) and regular Treasuries.
Real rates typically lead gold at major turns. This happened at the bottom in March 2020, and in June 2021. Recently a massive divergence has developed between real rates and gold, with real rates rising and gold lagging.
This suggests that gold will be going much higher in the coming months. What would trigger this? Inflation.
Real rates represent the difference between the yields on TIPS and regular Treasuries. So when TIPs outperform regular Treasuries, this line rises, and when regular Treasuries outperform TIPs, this line falls.
The fact that real rates are rising so aggressively means that TIPS, which focus on inflation, are dramatically outperforming Treasuries right now. This means the bond market is predicting greater inflation ahead.
What would trigger this? First, the $2-$4 trillion infrastructure program that the Biden administration is hoping to sign into law in the near future and second, Jay Powell’s continued tenure as Fed Chair in 2022.
Regarding the first, policymakers have already made it clear from their response to the 2020 shutdowns that their entire blueprint for dealing with crises boils down to just two words: Print money.
Policymakers printed a raft of money to combat the effects of Covid-19 lockdowns; if you add up all of the money the US has ever printed, over 40% of it was printed in 2020.
The Biden administration has already implemented a $1.9 trillion stimulus. It’s now attempting to sign the $2-$4 trillion infrastructure program into law. After that, it hopes to implement a $1.7 trillion climate change program.
Inflation is already roaring. What will another $2-$4 trillion in money printing unleash? And that’s just the federal government. We’re not even accounting for the Fed here.