Continued Supply Chain Disruptions

It was another “risk off” week for financial assets as measured by a 2.21% decline in the S&P and a 3.49% decline in U.S. Treasuries. Most certainly last week was a continuation of the move away from U.S. Treasuries leaving gold alone as a safe monetary haven.

By the way, what’s happening to Bitcoin? I thought, given its limited supply, it was supposed to replace gold as the most reliable safe haven during fiat monetary storms. But alas, unlike gold, Bitcoin isn’t providing a safe haven from market chaos. Instead it’s trading like a stock. So it fell 6.65% last week while gold rose 1.37%. Silver, which is part money and part commodity, rose 3.70% and the Rogers Raw Materials Fund rose 5.17%. This is continuing to demonstrate the phenomenon of “outside money” (commodities) overtaking “inside money” (fiat money denominated financial assets.) It seems real world reality is finally catching up with Keynesian central bank counterfeiters who say you can simply imagine value into being. Perhaps the same could be said of Bitcoin advocates? We could only wish that similar falsehoods like those taught by the poisonous pen of John Maynard Keynes could had been recognized decades earlier rather than need to be learned the hard way now via the violence of Vladimir Putin. Had the Keynesians not prevailed and money remained attached to gold or silver, a combined Russia and China would not now be in the position to replace America as the number one super power.

There is a commonly held belief expressed by David Rosenberg and other highly esteemed economists that once we head into a recession, consumer price inflation will be tamed. While that has been the case during the past number of decades, this time it is in fact different! While massive money printing, funding of socialism, and anti- energy policies of the Biden Administration have played a major role in causing consumer inflation and in triggering America’s geopolitical demise, it is the massive decline in supplies of goods and services along with the Fed’s decades-long irresponsible money printing that are triggering this inflationary fire. Supply chain issues that resulted from COVID along with easy money conditions started the rise in prices. Conceptually, as shown on the supply and demand chart on your left, a curtailment of supplies from COVID lockdowns (which by the way are still ongoing in China, thanks to its ridiculous COVID-zero policy) pushed the supply curve from A to B. That was largely responsible for the beginning of serious price increases.  

But now with the war, supply chain related trade restrictions and most significantly U.S.-led sanctions are pushing the supply curve even further to the left from B to C as supplies are being even more restricted. That’s a major reason for rising prices now and there isn’t anything the Fed can do to stop that without immediately throwing us into a global depression. With their hawkish rhetoric and so far timid actions, the equity markets are already starting to melt down. And given supply shortages, the T-Bond is also starting to head into what looks like the most significant bear market since the 1970s, which was the last time we had double-digit inflation.

Conventional wisdom from the mainstream holds that gold should not be rising when interest rates are rising. In fact, as an excellent report from Goldmoney Insights’ web page demonstrates, gold has been rising even as real rates have been rising. Yet the paper makes the point that neither the TIPS breakeven rate or gold itself are truly registering the real rise in price ahead of us. The TIPS breakeven rate is suggesting that a 2.9% rise above the 10-year rate is required, which is below the 3.15% premium that gold itself is predicting. Without going into why Goldmoney’s model says gold itself is under-rating the future inflation rate, keep in mind that the Fed and its banks are constantly in the futures markets to drive gold and TIPS prices lower no doubt as part of its own propaganda campaign aimed at keeping the currency it counterfeits—the dollar as the world’s reserve currency.

Except for oil supply shortages following gold’s detachment from the dollar in 1971, Western central banks have not had to deal with a condition where the laws of nature trump arrogant declarations and monetary market manipulation of Keynesian economists. Again what is becoming apparent is that “old money” (commodities) is in the process of trumping “new money” (fiat created out of thin air), demonstrated now by Russia backed by China and other nations. While the U.S. dollar is rising against other western countries, it isn’t rising against countries that are net exporters of life-sustaining commodities like food and energy. Sanctions by America and the removal of SWIFT against Russia have left Russia with no choice but to prove that the thing we all need to sustain life on earth is not money created out of thin air and military power to expand the empire. What is needed is real money to buy real things that we all need to stay alive. Putin will accept either gold or rubles from “unfriendly” countries for payment of his life-sustaining energy and food products that Europe is going to need to have. We are witnessing a new world order in the making. When the dollar loses its reserve status which it will because it is backed only by the hot air of Keynesian economists, not tangible wealth in the form of gold or silver, I fear we will long for the days when our PPI was only 11.2%.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.