Inflation Tsunami - Top ten reasons to buy gold in 2022

Discussion in 'Markets & Economies' started by EON Bullion, May 10, 2022.

  1. EON Bullion

    EON Bullion New Member

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    I am a financial Risk Manager, This is my view on the top ten reasons to own bullion in 2022. Let me know what you think.
    Thanks
    Rory
     
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  2. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    Firstly, thank you for your post.

    Now I'll let you know what I think.

    1. Money supply did not contribute to the global inflation for commodity prices, that's a fallacy. Yes to asset prices, no to commodity prices. The bout of inflation we are experiencing is a supply/demand driven problem brought on initially by the pandemic which disrupted supply chains and reduced output, compounded by the war in the Ukraine and our highly interwoven global markets.

    You mention Japan as an example, for the past 25 years Japan has been steadily increasing its debt yet the CPI has not kept track.

    Screen Shot 2022-05-11 at 8.25.35 am.png Screen Shot 2022-05-11 at 8.26.41 am.png

    In Australia the vast amounts of debt issued did not reach consumers, especially when compared to the US. Instead it either sits in ES balances at the RBA, or was lent to big business to purchase assets and of course the housing market which again of course benefits the big end of town as many of those mortgages have been bundled up into securities.

    Screen Shot 2022-05-11 at 8.39.55 am.png Screen Shot 2022-05-11 at 8.38.16 am.png Screen Shot 2022-05-11 at 8.38.32 am.png Screen Shot 2022-05-11 at 8.38.41 am.png



    2. Ballooning debt. There is no intention of paying off debt. But that's besides the point, as explained above debt would lead to price inflation if the money entered the real economy. Which in Australia's case especially largely hasn't happened.

    Despite my reservations regarding your premise around sovereign debt, no doubt it influences the market, especially players that share your view, however erroneous it is. The rest of your video I generally don't have a problem with, though I place no value on the GSR or the notion that "gold is money". I do find your "6 principles" a novel way of expressing how gold has come to be valued over the millennia as I haven't come across it expressed that way before.
     

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  3. jultorsk

    jultorsk Well-Known Member Silver Stacker

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    Re Japan, here's an alternative view.

    https://mises.org/wire/what-causes-exceptionally-low-inflation-japan-and-switzerland

    The low level of interest rates in Japan and Switzerland curbed foreign capital inflows and favored capital outflows. Japan's net capital outflows have amounted on average to 2.5 percent of gross domestic product (GDP) per year since 1980, while Switzerland's have been as high as 8.4 percent of GDP. Compared to the Bank of Japan, the Swiss National Bank has taken on a more active, direct role in capital exports by resisting the appreciation of the franc via buying euros (and selling francs). The persistent outflow of capital has dampened the purchasing power in both countries, thereby reducing domestic price pressures. This applies to both goods and real estate prices, which in each country have risen at a slower pace than in the US.

    gs2.jpg
     
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  4. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    Is that an "alternative" or is it what has happened?

    It doesn't really matter I guess, the "money printing = price inflation" is just wrong.
     
  5. GreatSouthernTime

    GreatSouthernTime Well-Known Member Silver Stacker

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    Agree with all of this except not including fiscal policy as the major difference between the last 2 years and years prior.
    No doubt supply constraints has caused inflation but I would argue the major reason we didn’t see consumer inflation was because debt was kept in the financial system, whereas now we have injected trillions directly into consumers pockets.

    I have no idea what percentage of inflation we can contribute to supply vs fiscal policy but I will go out on a limb and say once supply shortages are resolved the inflation rate will stabilize but the prices of goods won’t come back down to pre fiscal stimulus levels and will remain elevated.
     
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  6. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    And just to tip another bucket of cold water on the fallacy we'll look at Switzerland:


    Screen Shot 2022-05-11 at 9.23.54 am.png Screen Shot 2022-05-11 at 9.24.08 am.png
     
  7. jultorsk

    jultorsk Well-Known Member Silver Stacker

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    Albo suggested 5%+ hike to minimum wages, so I'd say it's a safe bet prices of goods will keep leaping upwards.

    https://www.afr.com/politics/federa...-pay-rise-will-crush-business-20220510-p5ak66

    Employers and economists are warning that Labor leader Anthony Albanese’s advocacy for pay rises greater than 5 per cent to keep pace with soaring cost of living will crush businesses, fuel inflation and put upward pressure on interest rates.

    Seeking to distinguish Labor from the government, Mr Albanese said he would “absolutely” back a 5.1 per cent increase to the minimum wage in line with the headline inflation rate, declaring workers’ pay should not be allowed to go backwards.
    -
    The comments from Mr Albanese, who has emphasised a willingness to work with business, have alarmed industry groups over a future Labor government’s support for big wage increases.

    Businesses are reporting a rapid increase in the cost of workers. National Australia Bank’s business survey on Tuesday showed labour cost growth hit 3 per cent in quarterly terms last month.

    CommSec senior economist Ryan Felsman said: “With labour costs and output prices remaining firm, rising price pressures are likely to prompt further monetary policy tightening by the Reserve Bank in an attempt to rein in inflation.”

    Council of Small Business Organisations Australia chief executive Alexi Boyd said higher wage costs had already been locked in for businesses with the increase in superannuation guarantee to 10.5 per cent and removal of the $450 a month threshold for workers to be paid superannuation from July 1.
     
  8. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    I think fiscal policy is the big difference (without having read the Mises.org link that probably makes a big difference too), after all they've been struggling with low inflation for decades and about half the debt is owned by the BOJ which I think from memory is statistically more significant than most of the rest of the Western world. The US and Switzerland have both been spending higher proportions as a % of GDP than we are and Japan's has remained pretty stable for the past decade. I haven't seen trillions injected into our real economy by our government though.

    More graphs :D:

    Screen Shot 2022-05-11 at 9.37.14 am.png Screen Shot 2022-05-11 at 9.37.23 am.png Screen Shot 2022-05-11 at 9.37.33 am.png
    Screen Shot 2022-05-11 at 9.39.34 am.png

    Have at look at ours!! No wonder there is no business confidence in Australia. Our governments have had no clear idea about what they want to do.
     
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  9. GreatSouthernTime

    GreatSouthernTime Well-Known Member Silver Stacker

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    Trillions in stimulus globally. Scared to think how many billions in Australian fiscal spending alone but pretty sure the majority is probably accounted for in Vic.

    In regards to the above charts, is this a bad thing?
     
  10. EON Bullion

    EON Bullion New Member

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    Hi Shiney,
    Great feedback!, I would argue that the term inflation is a much manipulated term, as there is so much political capital associated with its definition, and keeping the CPI component of it under control, as is the mandate of the central bank.

    In the Federal Reserve Bulletin (1919) inflation was defined as
    “Inflation is the process of making addition to currencies not based on a commensurate increase in the production of goods.”

    This definition was many times since

    the Definition by the federal reserve today is:
    "Inflation is the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy."

    to focus on a narrow list of prices as measured by the CPI. There is of course no doubt that supply chain issues and energy prices have caused much of the shock inflation we have seen.
    In my next video I will argue that there are two distinct categories for inflation, Asset inflation, and Price inflation. Since 40% of the assets are owned by 1% of the population, and the bottom 50% own just 5% of assets. QE is specifically designed to avoid price inflation as seen by the common person, particularly of those items measured in the CPI.

    That situation could easily change going forward though. Assuming we believe there is some truth in the quantity theory of Money PT = MV then:

    upload_2022-5-11_14-32-15.png
    upload_2022-5-11_14-32-35.png
    upload_2022-5-11_14-32-56.png
    upload_2022-5-11_14-34-0.png

    Would also indicate that inflation should be flat as observed between the periods 2000 to 2018. Except for a pullback from the deflationary period after 2008. But a simple calculation will show that the sensitivity to the velocity of money has increased dramatically, which has generally been assumed stable in this model previously. A return to the velocity of Money experienced in 2019, will cause huge rises in inflation, assuming even a very small pull back in the money supply. A good hard recession will also destroy money balancing this out (this seems inevitable now) . The velocity of money has gone down as the asset bubbles have exploded, as it is well known the wealthier people do not circulate money, they save or hold them in assets by definition. When the Asset bubbles burst some of the money will be destroyed but much of it will run out of the assets and be seeking a place to go, potentially creating more inflation.


    I don't think it is fair to say that the money supply has nothing to do with price inflation, I think a more nuanced view would be that QE is designed not to inflate some assets, which are used as metrics for the performance of the central bank, but there is a huge price to be paid over the long term for inflating assets, and this will make its way into the real economy over time.

    The next question has to be, what might cause in increase in the velocity of money?, inflation is known to do this, who Afterall wants to be left holding a devaluing asset, perhaps having self compounding effects moving forward, and sending us into a death spiral, that will hasten the move toward digital currency.
    Thanks Again for the valuable comments, and the lively debate.
     

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  11. EON Bullion

    EON Bullion New Member

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    Having lived and worked Finance in Zurich from 2011 to 2017, I am well acquainted with the issues they face. Switzerland has a different problem than the rest of the world, as when there is global crisis money flows into the Swiss franc, as the swiss franc gets stronger this will result in deflation in the economy. As Naturally goods and services cannot all rise with the Swiss franc, or Switzerland would become extremely uncompetitive, and this could cause a different type of crisis there. Switzerland has a different problem than the rest of the world in that their currency is too strong, this is why they had it pegged to the dollar a 1.20 for many years, but eventually this peg broke.
    upload_2022-5-11_14-50-52.png
     
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  12. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Gold has gone up since 1971 because of supply shortages?
    I would question that seriously.

    Inflation is an increase in money supply and nothing else and supply shortages only affect that specific market.

    Please explain how gold has risen since 71 because of supply shortages and why gold hasnt gone down with resupply.
    Been listening to Brandon again?
     
  13. Ag bullet

    Ag bullet Well-Known Member

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    gold hasn't gone up since 1971. currency value has gone down.
     
  14. JohnnyBravo300

    JohnnyBravo300 Well-Known Member

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    Same question.
    Currency value has gone down since 1971 because of supply shortages? Dont think so.
     
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  15. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    We're talking price inflation. We've made that abundantly clear on quite a number of occasions in the various posts on this forum. Instead of derailing the debate either keep up with the conversation or just shut up.
     
    Last edited: May 12, 2022
  16. Shaddam IV

    Shaddam IV Well-Known Member Silver Stacker

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    Indeed, it's important to define "inflation" when having these discussions as there is more than one type. Welcome to the Forum EON Bullion and for the video, hopefully you will get some followers for your Youtube channel from members here. And thanks Shiney! for the well researched replies.
     
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  17. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    Is what a bad thing?

    What is bad is that The Australian government has no clear agenda. Short periods of rises in spending followed by short periods of cuts to spending don't install continuity in fiscal policy nor does it install business confidence. It's as Koo said in his paper regarding balance sheet recessions, governments pull the rug on fiscal policies because of pressure from the electorate (voters, lobby groups, the media etc) long before any meaningful goal has been achieved.
     
  18. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    @EON Bullion, in the context of the debate around inflation that is widespread in the media and in the various statements from the RBA and The Fed, inflation refers to a rise in the price of goods/services. Yes the definition has changed over time.

    I don't hold to that theory clearly :). Inflation is always and everywhere with us but it is not always and everywhere a monetary phenomenon.

    http://www.ekonometria.wne.uw.edu.pl/uploads/Main/polan_degrauwe.pdf

    Re: Switzerland, thanks for the background info on why Switzerland's inflation has climbed despite a reduction in the level of government debt to GDP.

    That's related to QTM therefore it's another concept that is meaningless to me. :)

    https://fedguy.com/zombie-concepts-velocity-of-money/#more-148

    We already have a digital currency.

    There are a couple of threads related to CBDCs floating around here. Basically, the introduction of a CBDC will be advantageous for cross-border transactions, domestically though there are legislative hurdles to overcome which may be unsurmountable. Should the RBA be given the green light to issue CBDCs to the retail market then that could very well be the end of of our commercial banking system, or at least undermine its financial stability and would result in an expansion of the RBA's autonomy, a very undesirable outcome. Hence I don't see any threat from a deliberate policy decision by governments working through CBs to introduce CBDCs in order to destroy fiat issued currency.

    The upshot of that last comment is that the possible introduction of a CBDC is not a compelling reason to be exposing myself to precious metals.
     
  19. mmm....shiney!

    mmm....shiney! Administrator Staff Member Silver Stacker

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    This one deserves it's own response.

    Absolutely.

    While central banks provide commercial banks and funds with a guaranteed market for government securities, the excess credit building will find its way into asset markets. As far as Ii understand it when that tap is turned off, ie CBs taper their security purchases then the private sector will have to make up the shortfall in the market for treasury securities. In order to attract buyers bonds prices will have to fall, this fall in the value of bonds will of course have balance sheet ramifications for the private sector who are required by law to meet capital equity ratios etc as part of Basel III. In the vent that the value of a fund's balance sheet shrinks due to a fall in bond prices, they are going to be forced to re-balance, ie sell off riskier assets.
     

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