Inflation Surging Could Be Great for Gold Prices
It’s important to pay attention to inflation if you want to know where gold prices are headed. Rising prices in the U.S. economy say that the yellow precious metal could have a very shiny future ahead.
As it stands, we are seeing inflation in the U.S. economy picking up speed, and it’s expected to increase going forward.
Just recently, the U.S. Bureau of Labor Statistics reported that, in the first two months of 2017, prices in the U.S. economy increased by 0.7%. This was the highest inflation in the U.S. economy in the first two months of a year since 2009. (Source: “Consumer Price Index – All Urban Consumers,” U.S. Bureau of Labor Statistics, March 15, 2017.)
Here’s the thing, if we assume that prices increase by 0.2% each month for the next 10 months, we could be looking at inflation of close to 3.0% for 2017.
If we look at indicators like the five-year forward inflation expectations posted by the Federal Reserve Bank of St. Louis, it’s calling for inflation to be around 2.15%, and it is increasing. Please look at the following chart.
But don’t stop here, dear reader.
You have to keep in mind that, over the past several years, the U.S. Federal Reserve has pretty much made the balance sheets of the big banks great, by buying garbage assets (mortgage-backed securities) from them.
Now the Federal Reserve is looking to raise interest rates. The Federal Funds Rate now stands at one percent, and we are expected to see several rate hikes in 2017.
Understand that higher interest rates are great for banks, so don’t be shocked if we see a lot of lending; something that was subdued for the past few years due to lower interest rates. Banks could now earn higher interest on the loans they generate. This could cause a short-term burst in consumption, and add to the inflation that’s already soaring.
Gold Prices Setting Up to Reward Investors
With all this said, know that gold prices rise when inflation soars. This has been the case not just for a few years, but for thousands of years.
Dear reader, you will hear a lot of arguments these days for not owning gold. The common belief is that, as interest rates rise, gold prices decline. This is a false narrative, and could keep investors away from massive returns. Yes, interest rates are increasing, but understand that inflation is also increasing, and at a much faster rate.
All too often, investors forget that gold is a global phenomenon. The precious metal is not limited to the U.S. economy. Around the world, central banks are engaged in monetary policies that devalue their currencies, and gold becomes very useful in those situations.
As I see it—and this is a very bold statement—there’s a perfect storm brewing for much higher gold prices ahead. It wouldn’t shock me for one second if, two to three years from today, we could be looking at the precious metal, saying, “wow, gold at $1,200 an ounce was really cheap,” and looking at mining stocks, saying, “they were really selling for pennies on the dollar.”