Gold News

Inflation anxiety

Gold never really goes up; it just retains value vs. falling assets...

THE UNITED STATES and global economies have both received a stiff dose of inflation already.

   This inflation could be remedied by appropriate action at the Fed and by the other central banks. And although there are other, more effective methods, in practice this would likely mean rate hikes.

  • In 1969, to counter incipient inflation, Fed chairman William McChesney Martin took action that drove short-term rates to 10%.
  • In 1974, Arthur Burns’ anti-inflation policies at the Fed took rates to 13%.
  • In 1980, Paul Volcker took rates to 14% and higher.
  • In 1989, Alan Greenspan fought off inflation by taking interest rates to 9.5%.

Today, however, the political support for such policies is virtually nil, especially considering the wave of adjustable-rate mortgages coming due for refinancing over the next three years.

Indeed, many Fed-watchers have expected the Fed’s next move to be a reduction in interest rates. Whether this turns out to be correct or not, this expectation alone suggests that the trend towards a further decline in the Dollar's purchasing power will continue.

It may not show up in the Euro/Dollar or Dollar/Yen rate; the Dollar didn’t fall much against foreign currencies in the 1970s either. But it would show up in the Gold/Dollar rate.

Following our worn but useful '70s roadmap, a move to $1000 per ounce or beyond would probably be accompanied by a blooming of full-on '70s-style inflation. It could happen by the end of this year.

Gold never really ‘goes up’. It simply holds its value while the values of other things are collapsing due to inflation and currency devaluation. Many times, during the 1960s or '90s for example, it is the most useless of assets – sitting inert and generating no income.

In inflationary periods, however, this inertness of value is gold’s most admirable quality.

It seems these days like a lot of people can’t help blurting out the H-word – hyperinflation. I am one of them, and I notice that the normally levelheaded Marc Faber has his episodes as well. We are far from such a scenario at this time, and by any reasonable standard, the likelihood of such an outcome remains extremely remote.

I take this premature anxiety as a sort of premonition, the way some people feel an earthquake in their knee before it happens. There is something going on that we haven’t seen before.

The US Dollar is apparently being rejected worldwide, partially as a result of the unpopularity of US foreign policy. How this all plays out remains to be seen, but a certain amount of preparation might be worthwhile if that tingling-knee thing turns out to be right.

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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