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July
05
2023

Our Purchasing Power Is Getting Wrecked
Peter Reagan

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Mike Maloney goes deep into the inflation issue, a Great Economic Reset, and Indian households have more physical gold than any single central bank.

Purchasing power is getting destroyed, and those without assets suffer most

Mike Maloney, in his latest in-depth analysis, uses a little humor in what is mostly a humorless situation. He shows a car crashing into a post in an empty parking lot to give us an idea of how badly the Federal Reserve has messed up the economy.

Melodramatic? Yes, but that’s what gets attention these days.

But is it inaccurate? Let’s consider the facts…

Maloney raises an important point multiple times throughout the video: If you’re ultra-wealthy or live in their neighborhood, this inflationary situation actually benefits you. On net, at least – the 1% are paying more for their gas and eggs, too. However, inflationary surges in asset prices more than offset higher costs on goods and services.

That’s the wealth effect we’ve heard so much about. As always, transferring purchasing power from the 95% to the 5% wealthiest households. And it’s happening now faster than ever.

Utilizing a plethora of charts, Maloney outlines just how this is happening. We can start with purchasing power and inflation. Between 1913 and 2023, the purchasing power of a dollar went from $1 to three cents – yes, that’s a 97% loss of purchasing power. Essentially, inflation is a steady attack on currency which benefits the owners of assets.

It’s a global phenomenon, too. Lebanon is seeing a 352% increase in food prices these days. Most countries, developed or not, are between 20%-10%. The U.S. has an uncomfortable 8.5% food inflation rate, around twice the official inflation rate. So while you heard that the Federal Reserve somewhat managed the inflation rate by keeping it to 4.0% in May, the reality is far from these figures.

Maloney points out that currencies are so poorly thought out that even having no currency doesn’t protect you from inflation. There are two ways to protect workers from inflation: index their pay to the inflation rate, or immediately spend all currency on assets.

The latter approach reminds me of the Bloomberg story where Argentinians share advice for surviving in a high-inflation economy (previously covered here).

Maloney stresses that, without gold, you can’t escape inflation even by spending all your cash and saying: “Well, I have no cash, so it’s not eroding.” Eventually, you’ll pay for something, and when you do, you’ll feel the full brunt of inflation and more.

It’s clear that this system is designed to benefit those who hold most of their net worth in something other than currency – so the solution is to diversify by spending currency on assets. From there, the question becomes: which? That’s a complicated question… For example, we know we have a housing crisis, but how is it going to get resolved?

Property owners will be forced to sell, yet real estate remains too expensive for most to consider as an investible asset. Gold, though? Everyone can afford to diversify with gold. Maloney specifically mentions gold’s resistance to the inflationary erosion of purchasing power.

Gold investment can be customized to fit your savings or capital. This is a crucial point to remember during what many call an open attack on the middle class (with perhaps nothing short of eradication ahead – through incompetence or through malice? To the victim, it doesn’t make a difference.)

The Fed thinks Klaus Schwab’s wish will come true

Here’s my problem with the Federal Reserve announcing a 70% chance of a recession in the months ahead…

Avoiding recession was supposedly why trillions of dollars were printed over the last couple years – more specifically, about 40% of all the dollars now in circulation are less than three years old. Let’s remember, this absolute tsunami of freshly-printed money that flooded the globe was supposed to save us from a recession.

So, what happened? If the money flood didn’t fix things, what was the purpose of it? Indeed, it seems to have only brought on another recession, one that’ll go into the history books.

We know this just from Fed Chair Jerome Powell admitting the inflation fight is going to take years. Coming from someone who refused to acknowledge inflation until it hit five decade highs, that’s a worrisome statement. David Lin is joined by Mike McGlone to discuss the why, the how, and the what to do.

The pair note how this is the highest forecast percentage since 1982, while generally agreeing that the coming recession and asset correction will be the worst we’ve seen in our lifetimes. Deflation can generally be just the thing to have a well-functioning economy. When it doesn’t work, however, is when you pump trillions of dollars of liquidity into the system in the short-term and inflate asset prices. From housing to negative bank deposits, we’re already seeing the effects of a pumped-up economy whose valve has been shut.

The pair use the term “double dog daring” to outline the relationship between investors and the Fed, which sort of makes sense. As McGlone says, any time risk-on assets had a 20% correction since 2000 was a straightforward recommendation to buy them because the Fed was obviously going to jump right in with QE, but that’s not the case now.

This is setting the stage for what the interview calls the “greatest economic reset in our lifetime”. We’ve pondered plenty on how the Fed plans to get out of this mess, as it can’t just do the usual QE thing since QE was what caused the mess to begin with. Analysts are becoming increasingly concerned with this notion, with varying and conflicting opinions. Why does the Fed feel the need to continue raising rates, asks McGlone? Probably because inflation is far higher and deeply-rooted than anyone would like to admit, to the point where even officials have to acknowledge this.

We hardly need to elaborate how every central bank besides China, which is in a recession of its own, is just doing what the Fed is doing with some lag. So it will be a global phenomenon with little escape.

As McGlone puts it, there are a few instances in every investor’s life where they should overweight low risk assets such as gold, and this is one of them. Why take on more risk than we need to?

Indian households own more gold than any central bank (and they’re buying more)

With the biggest year of central bank gold buying in history behind us, chances are that this year will be even bigger. And there’s one not particularly wealthy nation competing with the world’s central banks to stockpile gold – on the private citizen level.

According to data from the World Gold Council, Indian households own an estimated 24,000-25,000 tons of gold, a significant jump from 21,000-23,000 tons just two years ago.

In comparison, the estimated figure of central bank holdings was placed around 35,750 tons this year (about 20% of all of the gold ever mined in human history).

Remarkably, that means that the gold holdings of Indian citizens also nearly make up some 13% of all above-ground gold.

This is all the more remarkable when we consider that central banks and the average resident of Delhi have very different levels of access to gold. Central banks enjoy the luxury of buying investment-grade gold bullion bars in bulk with razor-thin premiums over spot price. In contrast, Indian households often own their gold in the form of jewelry, which tends to be scattered across the item and holds a high premium.

Note: I’ve said it before and I’ll say it again: Gold jewelry is NOT an investment! Gold jewelry retailers in the U.S. sell at huge markups, up to 300% over the spot price. When you buy gold jewelry, you’re not investing, you’re making a discretionary purchase. Despite its intrinsic value, gold jewelry isn’t as liquid as gold bullion. It isn’t fungible (a characteristic of commodities – essentially, any one unit is indistinguishable from any other unit).

While market analysts in the U.S. seem convinced the price of gold will struggle in the face of the Fed’s inflation fight, Indian households are gearing up to buy even more. According to various reports from the nation, India is practically salivating for even a small drop in gold’s price.

Saiyam Mehra, chairman of All India Gem & Jewellery Domestic Council, isn’t buying into the “Fed inflation fight means a stronger dollar” narrative, though. He expects gold prices to rise in the months ahead, noting that Indian jewelers are stocking up now, making the most of today’s gold prices in anticipation of growing demand.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

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