In recent years, inflation in official government figures has been virtually non-existent. In fact, the Federal Reserve and other central bankers around the globe have been valiantly trying to stimulate inflation to no avail.
The perfect storm may be brewing for 2017 and money velocity — the speed at which money changes hands throughout the economy — may be finally about to kick into high gear.
Markets Are Already Signaling Potential Inflation Ahead
In the wake of the surprise election of President Trump, the yield on the U.S. Treasury note surged from 1.77% before the election to 2.27% just a few days after the results were in this represents a startling rise in interest rates in a very short period of time. Bond-holders are dumping Treasury notes (the price moves inverse to the yield) as they anticipate inflation on the horizon.
Where Could The Inflation Come From?
One of the signature proposals by President Trump includes a $1 trillion infrastructure spending plan to rebuild the country’s roads, bridges and even airports. This plan is intended to create jobs and stimulate growth. Wage growth is good except too much of a good thing can quickly turn bad. Economists are already warning about the potential for inflationary pressures to rise quickly.
The increase in inflation could arise from several areas, not only the infrastructure plans. Another key proposal from the President includes repealing parts or all of the regulations imposed on the banking sector in the wake of the global financial crisis. Bank lending is expected to pick up as regulations are eased, which could help to stimulate inflation and money velocity.
How Does Gold Fit Into This Puzzle?
Gold slid lower in the days after the election in a “risk-off” type of financial trade. Stocks rallied in euphoria that pro-growth policies could lie ahead, which removed short-term demand for gold.
The gold price quickly found support in the $1,215 per ounce zone as emerging market buyers jumped in to buy physical demand at the lower price point, notably from China.
The lower prices in gold were viewed as a buying opportunity for long-term investors.
Western investors face a bevy of uncertainty ahead, including how the new Administration’s policies will truly impact the economy. Rising inflation remains a key risk, along with the potential for heightened geopolitical tensions. The President-elect has questioned at times the NATO allianceand also threatened to slap tariffs on China and potentially start a global trade war.
Gold has a solid track record as an inflation hedge, and an “insurance policy” against geo-political and economic uncertainties. The Chinese have rushed into the market this week at the lower prices points as they perceive gold around $1,225 an ounce as a bargain.
U.S. investors have the opportunity to build their hard asset allocation now at a better price point than three months ago. The 2016 uptrend in gold remains intact. It makes sense to use the price dip as a buying opportunity to diversify your portfolio against the uncertainty that lies ahead.
Call your Blanchard portfolio manager today to discuss the current outlook and options that may be right for you at 1-800-764-9135.