Watch Gold — This Little Dutch Boy Is Running out of Fingers

Last weekend I spent a good chunk of time speaking with a close friend of mine in Argentina. Among the many, many things we talked about were prices.

Prices are running wild in Argentina. Inflation was at a whopping 36% for 2020, with projections to go up to 50% this year.

My friend told me she just received a sudden windfall and with things the way they were, she didn’t wait to exchange it all into US dollars to protect her money from runaway inflation.

Inflation makes it more expensive to buy things and can be a cash killer. Not only does it erode your savings but the lag until salaries are updated can eat into your earnings.

Speaking with her brought home — once again — how much uncertainty and how taxing to your wealth inflation can be.

There isn’t much inflation showing up yet in consumer prices…not yet.

But there’s plenty of inflation around. We’ve said plenty of times before that inflation is flowing into asset prices like property and the stock market.

But check out the following chart:

Port Phillip Publishing

Source: NASDAQ

[Click to open in a new window]

No, it’s not the price of bitcoin.

It’s the chart for lumber futures, which recently reached a whopping US$1,000 per 1,000 board feet. Low mortgage rates, more construction and remodeling are driving up demand for timber.

It’s not just timber though.

Copper prices reached north of US$9,000 a ton for the first time in almost a decade with more optimism and the expectation that the economy is recovering after the hit from the pandemic.

And then of course, there’s oil. Brent crude oil has run up 30% after Saudi Arabia cut supply earlier in the year.

Not to mention there’s a higher price to doing business through the pandemic. Here is Reuters:

As Home Depot heads into its busy spring project season — when shoppers build backyard decks and buy patio furniture — it is tangling with surging costs for goods and transportation, on top of tariffs that cost it and other U.S. importers billions of dollars.

Across the United States, major retailers and makers of everything from Peloton spin bikes and La-Z-Boy recliners to Kia Sorrento SUVs are battling the same profit-squeezing pressures. They pass those costs along to home-bound consumers, who are snapping up expensive-to-ship items like appliances, furniture and exercise equipment…

In recent weeks, the cost of transporting goods from Asia to the U.S. West Coast rose a whopping 200% year-over-year, while rates to the East Coast have more than doubled, data from S&P Global Platts Containers shows.

Transportation- and commodity-related inflation could send costs $70-80 million higher this fiscal year, said David Maura, chief executive of Spectrum Brands, whose products include Kwikset locks, Hot Shot bug spray and George Foreman grills.

Inflation is starting to seep into other areas of the economy.

Governments have been flooding money into the economy with much of that, unlike the last crisis, ending up into people’s pockets…

…And there’s still more to come. All those consumers have been locked at home, unable to spend. But what happens when lockups finish?

Now the vaccine is rolling out, there’s more optimism on ending the lockdowns…and more expectation that inflation will pick up, driving interest rates higher.

Of course, the big story this week on the financial markets is that bond yields have been rising with the US 10-year bond yield really starting to pick up. The worry of higher interest rates has bogged markets down all this week.

Higher interest rates are quite the problem when you have high debt.

Only during the pandemic the world added another US$24 trillion in global debt according to the Institute of International Finance (IIF). This brings global debt to a grand total of US$281 trillion or 355% debt-to-GDP.

We can’t afford higher interest rates.

But the Fed has been plugging the holes in this broken system for decades, much like the ‘Little Dutch Boy’ who put his finger in the dam to stop it from cracking.

Before things get too bad they always step in.

The Fed already calmed things down this week by saying they won’t be raising rates any time soon. The next place the Fed will likely aim its little finger at is yield-curve control to keep long-term rates from rising.

Looks like we’re heading towards higher inflation while interest rates stay at record lows, which is effectively negative real interest rates. And this is a great scenario for gold.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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