Inflation sped up in April. The stock market is rattled. Gold is climbing.

Investors are turning to gold as a hedge against the ever-rising inflation risk. Buyers drove gold to its highest level since early February this week. Gold now trades above $1,880 an ounce.

Consumer prices jumped 4.2% last month. That marks the fastest pace since 2008.

The recipe for classic inflation exists: too many dollars chasing too few goods.

People have money to spend and are eager to get back to normal post-pandemic level. We’ve got lots of dollars flowing around in the economy, thanks to the Fed. Indeed, money supply growth has climbed substantially since February 2020. The Federal Reserve has been buying bonds every month on the open market, which pumps new money into the banking system.

We’ve got shortages and panic buying – which is helping drive consumer prices higher.

Used car and truck prices surged a record-high 10% in April. A jump in travel opened the door to sharply higher prices on airfare, hotels and rental cars. Lumber prices rose a whopping 124% in 2021 amid huge demand for building materials. Copper has jumped 36%. There is a semi-conductor shortage.

Yet, the Federal Reserve continues to downplay the recent rise in inflation calling it “transitory.”

The big jump in April consumer price report intensified the inflation debate. Is it merely “transitory” as the Fed suggests?

Or, is this the start of a much bigger spike in inflation that could quickly become runaway inflation as the Fed sits on its hands with its easy money policies and interest rates at zero?

Corporations are worried too. On earnings calls this spring, executives at S&P 500 companies mentioned the word “inflation” four times more than just a year ago.

Everywhere you look, consumer prices are rising. Meanwhile, the Federal Reserve may already be behind the curve. The ticking time bomb of inflation has already gone off.

Gold has climbed $200 an ounce since the end of March.

A new bull market is beginning in gold and inflation is just one of the reasons investors are turning to the safety of precious metals. When you diversify with gold and precious metals, you can help protect your wealth from the risks facing the stock market and the U.S. dollar from inflation. Once inflation picks up steam, it can be very hard to put the genie back into the bottle. Are you ready?

Want to read more? Subscribe to the Blanchard Newsletter and get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.

It is common for investors to ask, “what is the right amount” when considering how to portion their investible cash across numerous assets. This question is especially common among gold investors because there has been an ongoing debate about what percentage of the total should be held in gold to generate the strongest possible return. The problem with this question is that it ignores the possibility that there can, in fact, be several “optimal” allocations.

How can this be? The word optimal seems to suggest that there is a best number to strive for. Research from Meb Faber, the co-founder and Chief Investment Officer of Cambria Investment Management, illustrates that this is not the case.

He examined the performance of several different asset allocation strategies. Each of the strategies represents an attempt to achieve optimal returns by allocation of investible funds across the right assets in the right proportions. Here is a sample of the portion of gold or commodities represented in some of the portfolios he examined:

Allocations

The exposure to gold varies greatly across the above list. Moreover, the selection and weighting of other assets like stocks, bonds, and real estate also vary considerably and can be seen in his analysis.

His conclusion: “they all performed pretty similarly.” The final performance figures reflect this similarity clearly.

Performance: Capital Asset Growth Rate

These results reveal an often unseen truth: a focus on finding the optimal gold allocation is irrelevant because when nearly any amount of gold is included in a balanced portfolio the investor is overwhelmingly likely to earn a return that is both strong and competitive with various other asset allocation models. In fact, a fixation on determining the perfect amount to allocate to gold may even hurt an investor’s portfolio because it will act as a deterrent from simply starting to invest. Moreover, seeking an answer to the question of “optimal” amounts may also encourage an investor to frequently re-balance which will decrease the long-term performance. The above results are based on portfolios that are treated as buy-and-hold strategies backdated to the 1970s.

Some might warn that while the returns are similar across different allocations, the risk profile differs significantly. This is also untrue as seen from the same data set. The Sharpe ratio is consistent across the portfolios. The Sharpe ratio is an equation that helps investors measure risk-adjusted return. Simply, the formula allows an investor to see what amount of an investment’s return is associated with risk-taking.

The Sharpe ratios in the above portfolios range only from a low of 0.44 (Ivy portfolio), to a high of 0.63 (Risk Parity portfolio). Here again there is little meaningful variation. An investor who selected the El-Erian portfolio, for example, took on the exact same Sharpe ratio as an investor who selected the permanent portfolio. Both clock in at 0.48.

The two pillars of a successful gold investment strategy are (a) to get started, and (b) to hold. Time spent trying to pinpoint a perfect allocation is unnecessary.  

Want to read more? Subscribe to the Blanchard Newsletter and get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.

Gold climbed to a seven-week high this week – boosted by weakness in the stock market, signs that inflation is emerging in the U.S. and amid strong demand from India and China for physical bullion.

The short-term trend turned positive for gold last week as the yellow metal climbed above its 50-day moving average – a bullish investing signal that confirms the end of the recent pullback in gold prices.

Short-term gold target

Looking higher, precious metals investors are targeting near-term gold gains to $1,825 an ounce – which represents a technical chart objective based off the March lows.

Big picture supports long-term gold gains

The macroeconomic picture remains positive for gold as inflation data is coming in hotter than economists expected, which supports a gold move back to the all-time highs above the $2,000 level hit last summer.

What’s brewing now? In March, the consumer price index jumped 2.6% from a year ago levels, the Department of Labor reported last week.

We’ve been warning about the inflation seeds the government has been planting for a while now. Get ready. It’s starting to heat up – and once inflation boils – it is hard to contain without crashing the economy.

It turns out that JP Morgan Chase chief executive Jamie Dimon is deeply concerned about the future of America.

While Dimon expects a boom from pent up demand, there is a chance that a rise in inflation will be “more than temporary,” forcing the Federal Reserve to raise interest rates aggressively.

What’s more? “Rapidly raising interest rates to offset an overheating economy is a typical cause of a recession,” Dimon wrote in his recent letter to shareholders.

Dimon compared the Covid-19 crisis to past difficult periods for our country, Dimon said that we have always bounced back stronger as a nation.

“In each case, America’s might and resiliency strengthened our position in the world, particularly in relation to our major international competitors,” Dimon said. “This time may be different.”

Here’s another way to look at the inflation problem.

In 2020, the U.S. Treasury created 23.6% of all U.S. dollars that are in existence. The government printed gobs and gobs of money in its efforts to flood the country with liquidity during the Covid crisis.

And, you wonder why the U.S. dollar is going down?

The Fed has put all its chips on the table and is gambling with our future. The Fed risks that inflation will not only pick up – but get out of control.

The next economic shock is brewing and it is an inflation crisis.

The remedy for hyperinflation is painful indeed. What can we learn from history? In the late 1970’s and early 1980’s inflation hit 14% and mortgage rates spiked as high as 20%.

In a classic article in Fortune magazine in 1977, legendary investor Warren Buffett stated his views on inflation:

“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. … If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker — but not your partner.”

Stock performance during high inflation

The 1970’s are considered a lost decade for the stock performance.

From 1972 to 1973 when inflation spiked rapidly to more than 6%, the S&P 500 crashed 40%.

Between 1970 and 1979, the Dow Jones industrial average gained just 4.8 percent. That’s right…not even a 5% return over nine years!

Gold climbed 2328% in the 1970s!

Gold, a classic inflation hedge, began the 1970s at $35 an ounce. In January 1980, gold skyrocketed to a then record high at $850 an ounce – as mortgage rates touched 20%.

Always be thinking about tomorrow, especially when the pace of change picks up.

The inflation data is picking up fast. The warning bells of inflation are ringing.

The tide is turning bullish for gold again.

Momentum is picking up for gold bulls as the U.S. stock market stumbles, the U.S. dollar weakened steadily throughout April and the price of bitcoin dropped as well.

If you want to protect your assets from a falling dollar and rising inflation, increase your allocation to gold now – before the price goes up even more.

Act now to lock in today’s low prices!

Want to read more? Subscribe to the Blanchard Newsletter and get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.

The pandemic appears to be in its third, and final act. It is true that the disease will still be in our lives for some time to come. We will face variants, and the possibility of ongoing annual vaccinations. However, the darkest days of contagion are likely behind us. What remains is an economy on the rebound.

Many economists are anticipating a strong, and prosperous second half to 2021. As recently as mid-March the Federal Reserve raised its forecast for domestic growth in 2021 by more than 50%. As a result, GDP is expected to reach 6.5% this year. If accurate, that figure would be among the highest in recorded history. While these forecasts offer plenty of excitement there is a less discussed and often unseen aspect to the economy today: fragility.

Gregory Daco, chief U.S. economist at Oxford Economics, has explained that the recovery is “fragile.” Part of what makes the US economy fragile today is the fact that many businesses are still struggling to find their way forward. Many companies aggressively pivoted, or even changed their model to accommodate the pandemic setting. Now, as COVID continues to recede, those businesses are determining what aspects of their initial change they want to preserve, and what aspects they want to abandon. Additionally, many businesses were able to stay afloat with borrowing and are facing the considerable cost of repaying those loans. Finally, much of the recovery is due to recent fiscal stimulus which, while critical and necessary, is not sustainable.

This “fragilizing” of the economy, however, is not only the result of the pandemic. These effects have been taking hold for some time and are structural in nature. That is, they are part of moorings that anchor the global economic system. One key factor of the global economy of the recent past and present is that it is characterized by output divergence. The level of output of various economies across the world varies considerably. As a result, the burden of maintaining the health of the global economy is shouldered by fewer and fewer countries.   

At the same time, continued globalization means that more countries are discovering that their success and survival are tied to the health of other countries. Simply, what happens “here” is highly contingent on what happened over “there.” The result is a more tenuous and fragile setting.

In such an environment there are many stores of wealth that become increasingly volatile. The value of the dollar is tied heavily to trade imbalances and the threat of inflation. Meanwhile, stock prices are subject to disruptions in the global supply chain that is so necessary to many businesses seeking annual growth.

Weathering the storm of a pandemic has demanded unimaginable resources. Any new, unforeseen threats could take a serious toll as many emergency reserves have been depleted. This aspect of a recovering but extremely fragile economy underscores the importance of storing a portion of personal wealth in assets that have less reliance on today’s increasingly delicate economy. For many the answer is gold which is not as prone to the threat of externalities as other assets and investment instruments.

Capitalizing on a rebound means remembering to gird for the ever-present threat of a new challenge. As Author Nassim Taleb explains “globalized economic systems operate as one. Errors spread and compound.”

This sentiment seems to encapsulate the underpinning of a gold investment strategy because, as former Federal Reserve Chairman Ben Bernanke once explained, “The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes.”

Want to read more? Subscribe to the Blanchard Newsletter and get our tales from the vault, our favorite stories from around the world and the latest tangible assets news delivered to your inbox weekly.