Gold and Inflation, Here We Go Again

  • Not again: Inflation is somehow BAD for gold?
  • One more shoe to drop before it’s all clear for biotech
  • Dead bank walking: It just got worse for Deutsche Bank
  • Finally, India’s weird cash crackdown starts to make sense
  • The 5 accused of turning political… a reader’s defense of Trump’s infrastructure lollapalooza… is it really time to sound the all-clear?… and more!

Someone, please, make it stop: “Gold Price Could Break Below $1,200 on ‘Trumpflation’ Fear,” says a headline at The Week.
As the world collectively lost its bearings this year (more than usual, anyway), a bizarre notion began to seep into the mainstream’s awareness — that inflation is a bad thing for gold.
Jim Rickards first noticed it in September: “Here’s the logic,” he told us, “as best I can make sense of it. Any hint of inflation might give the Fed a green light to raise rates. That’s supposed to be bad for gold. Some people say gold has ‘no yield,’ and, by definition, higher interest rates give investors some yield. Supposedly, if the Fed raises rates, investors will sell gold and buy Treasury notes for yield. Therefore, gold goes down.”
Evidently, this “thinking” is really catching on now that Trump’s been elected and he’s made all manner of expensive promises, starting with a $1 trillion public works program. “The fiscal stimulus,” says The Week, “could send inflation sharply higher — a move that would be bad news for nonyielding gold, which struggles when interest rates are rising.”
So what’s wrong with this logic? “Just about everything,” says Jim.
“The Fed will not raise rates for the fun of it. The Fed wants to keep inflation under control, but what the organization really wants is negative real rates. That’s where inflation is higher than nominal rates. It does the Fed no good to raise rates unless inflation is going up even faster. Yet that’s exactly when gold does its job of preserving wealth.”
This is exactly what happened in the late 1970s, when the United States stood on the cusp of hyperinflation.
As the calendar turned to 1977, the yield on a 10-year Treasury note bottomed a little below 7%, while the gold price was $135. Gold marched higher for the next three years. By the time gold hit its $850 peak in January 1980, the 10-year Treasury yield was pushing 11%.
No, the correlation didn’t last forever: In October 1979, Federal Reserve chief Paul Volcker began imposing emergency anti-inflation measures to prevent a global run on the dollar. Gold’s peak came three months later. After that, rates continued to rise well into 1981 — Volcker was determined to choke off inflation, and he did — and gold began to tumble.
But choking off inflation is the last thing the Janet Yellen Fed wants right now.
Volcker put an end to the inflationary ’70s by jacking up interest rates higher than the rate of inflation. Now, with the prospect of a free-spending Trump presidency setting off inflation, the Fed can raise interest rates and still keep them below the inflation rate — those are the negative real rates Jim’s talking about.
Yes, after a quick fake-out overnight, gold sits at nearly a six-month low this morning at $1,217. Yes, that’s a far cry from the $1,338 peak in overseas trading on Election Night. But for the reasons we’ve just laid out, it’s short-term noise.
If you want to take away the sting of paper losses from gold, there’s no better way than to pull a few instant income payments out of selected gold stocks. That’s what Zach Scheidt recommended to his readers a month ago. In a single day, they had the opportunity to pocket up to $910.
And Zach’s about to do it again tomorrow. If you want to know exactly how this “cash from gold” technique works, you’ll want to see this eye-opening demonstration by our publisher Joe Schriefer. But do so now; Zach issues the trade recommendations tomorrow, and we’re taking this video offline tonight at midnight.
The major U.S. stock indexes are a mixed bag as the new week begins. The Dow is slightly in the green at 18,864. The S&P 500 and the Nasdaq are slightly in the red.
Gold is down a bit, as already noted, but nearly all of that move can be chalked up to dollar strength: This morning, the dollar index crested the 100 level for the first time in nearly a year.
Treasuries are taking the real hit: Prices are down hard again, sending yields up. The 10-year is up to 2.24%. A week ago at this time, it was barely 1.8%. Hope you refinanced your mortgage already, if that’s something you’d been planning.
Biotech isn’t completely out of the woods.
The Nasdaq Biotechnology Index roared up nearly 9% on Wednesday, traders relieved the election results scotched any Clinton plans for price controls on drugs. Too, California voters rejected a price-control referendum.
But… “Top generics companies are the subject of a Department of Justice investigation for such unsavory illegal practices as price fixing and collusion,” says Ray Blanco of our science-and-wealth team.
“Negative news could potentially impact the entire pharma and biotech market” — even companies working on new branded, patented drugs.
It’s going from bad to worse at Deutsche Bank — a situation we’ve been monitoring all autumn.
“Deutsche’s problems boil down to bad debts, high expenses, inadequate capital and proprietary trading losses,” Jim Rickards reminds us. DB’s U.S.-traded shares have been more than cut in half over the last 18 months.
“Management is trying to remedy the situation, but it’s clear that massive amounts of added capital will be needed. The problem is that potential investors do not want to buy in until they are certain that all of the bad debts have been recognized. Yet the process of writing off debts impairs capital further and makes a run on the bank more likely.”
Enter the Bank for International Settlements — the central bank of central banks, as it’s known. The BIS recently imposed new capital requirements on the globe’s biggest banks. “They’re likely to hit Deutsche Bank especially hard,” says Jim. “These rules also stand in the way of raising new capital. Potential investors worry about dilution of their investment if the bank has to raise more capital in the future.
“This story is quiet for the moment but may return with a vengeance by December.”
[Ed. note: Jim’s latest book, The Road to Ruin, is set for publication tomorrow. It’s not just DB that’s in trouble. In fact, Jim strongly recommends you not deposit another dollar into your bank account until you read his book. Order through us and you get a special bonus chapter with his favorite road map for navigating the severe bear market he sees coming. If you can spot us $4.95 shipping, that’s all you’ll pay. Order here.]
The nonsensical bank note ban in India is finally starting to click.
We noticed last week when the government banned 500- and 1,000-rupee notes — worth roughly $7.50 and $15. Those accounted for 85% of all cash in circulation. The aim was to crack down on “black money” transactions that skirt the tax man.
But it wasn’t a typical war-on-cash measure… seeing as the government planned to issue new bank notes of 500 and 2,000 rupees. So what gives, really?
Our friend Chuck Butler at EverBank Global Markets, who knows all things currencies, spotted this item from Indian website of the Reuters newswire: The move “has started to disrupt cash-based gold smuggling and should benefit official importers of the metal.”
Now it makes sense: Back around 2012–14, we regularly chronicled how the Indian government was jacking up gold import duties, the better to arrest the country’s spiraling trade deficit. And we chronicled the smuggling efforts that inevitably resulted: Airplane toilets were a favorite hiding place, although more creative methods included old tube TVs with capacitors made of gold.
In 2016, the import tax is still in place — 10%, compared with 1% five years ago. With the cash switcheroo, Reuters says “a drop in smuggling will allow banks and refiners to charge a premium over official local prices, which include a 10% import tax. For most of 2016, gold traded at a discount in India as smugglers undercut official importers.”
“OK, I get it,” says Chuck. “Indian leaders want to stop the gold smuggling that is prevalent in India, and they think this is the way to do it. But to make 500- and 1,000-rupee bills ‘worthless’ is just crazy stuff, folks. And in the end, I doubt that it makes a HUGE difference in the gold smuggling that goes on here.”
“I read these articles regularly and generally find most very enlightening and helpful,” a reader writes.
[We’ve been at this long enough to see the “but” coming from a mile away…]
“I am, however, somewhat dismayed to see that the articles are turning more and more to politicization than enlightenment on the financial front.
“The 5 has consistently held its banner high that it is apolitical and would remain such. Now, I was very discouraged to hear words that are dangerously close to condemnation of something that hasn’t even had a chance to get traction.
“People are finally tired of the direction our country is heading and voted for a change in direction. Will this direction be better? Time will answer that question.
“The 5 needs to be careful not to fall into the trap that so many other well-meaning people have found themselves in. It is always easy to criticize when you don’t need to offer up your own plan.
“Keep on keepin’ on.”
The 5: As you point out, we have an ingrained suspicion of all politicians. It’s possible we’ll be harder on Trump because he’s sold himself as an “outsider.” God forbid we hold someone to the standard they set for themselves…
“Come on, Dave,” a reader writes after our “Trumpflation” episode on Thursday: “All the scare tactics aside, what do YOU suggest, just let the bridges decay, the inner cities fold up, the highways split into ruts and holes?
“Concrete wears out, asphalt wears out, steel rusts and finally blows away over the years — oxidation and weather, storms decimate, volcanos erupt, crap happens — we can’t keep blowing dough over in other countries — why in the hell don’t you espouse the fact that rebuilding the U.S., over time, is about all there is left?
“What is wrong with putting good Americans back to work in the trades — they can’t all be IT techs and computer whiz kids.
“Seems pretty damn simple to me, but I’m sure naysayers will find something wrong with common-sense rebuilding while controlling the overall budget and watching for things happening too fast — and why would we want it fast: Are we all going someplace in 2030 ?
“Help me understand why steady accomplishments in the construction trades will ‘cause’ inflation !! Will large-scale farming cause you a problem too?? Get me and my fellow Americans some sensible answers, as we are ready to go back to work full time! Thank you!”
The 5: You sure have a lot of faith in central planners, it seems.
This is the thing — one of the things — we warned about with Trump long ago. At least the pre-Trump Republican Party paid lip service now and then to freeing up the private sector to do its thing. Now, apparently, the country will go to hell in a handbag unless someone like Rudy Giuliani is barking out orders from Washington to fix a busted water main in Kansas.
Since when did “infrastructure” become a federal thing, anyway? “Ninety-eight percent of U.S. infrastructure is either the responsibility of the private business system or state and local government,” David Stockman pointed out last spring.
“Arguably, the only thing that Washington has any business being involved with is the interstate highway system. But the latter is generally in excellent shape along most of its current 47,000 miles of surface. In fact, it was the recipient of a huge dollop of largesse compliments of the $800 billion Obama stimulus, but most of these billions were wasted on premature resurfacing of highways that didn’t need it and low-priority interchanges.”
“Is it really time to dump gold?” a reader writes, throwing the cheeky title of Friday’s episode back in our face.
“Gold is dropping,” he says. “AR-15 sales down. Freeze-dried food down. Outpost cabins on an isolated lake… down. We have hope now.”
The 5: What, are you kidding?
We see the following at one “prepper”-oriented website in light of the Trump victory: “As calls for increasing violence by communist-backed organizations are influencing others to commit violence, including death and armed revolution, we feel it would be prudent to bring awareness to the potential for disruption in transportation, power and communications.”
Hmmm. We have our doubts that hordes of pajama-boy social justice warriors plan to converge on the “American Redoubt” to wreak righteous havoc. But hey, you never know…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. This is it: Our “cash from gold” tutorial — showing you in less than two minutes how you can extract instant income payments from the Midas metal — comes offline tonight at midnight.
That’s because tomorrow, Zach Scheidt will issue a new cash-from-gold recommendation. If you even think you might want to be on board, click here right now.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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