We May Have an Inflation Problem

This week we had the “good” kind of inflation with stocks and bonds rising in value while “bad” inflation (commodities and precious metals) fell. Good inflation is defined by the legalized thieves that the Federal Reserve feeds and rewards with easy money, which is responsible for the massive allocation of wealth away from the middle class to the top 1%. Both political parties detest honest money (gold or silver) because they cannot use it for their vote-buying handouts, though Democrats are the more anti-private property. They are attempting to buy votes now by massive give away programs and lockdowns, which is leading to the first serious wage inflation issue since the 1970s. John Rubino will be on my show on Tuesday to talk about how the markets are tipping in favor of labor, leading to a massive increase in strikes taking place in America. And I wonder why NYC Sanitation has not picked up the garbage all week long here in Queens? Absent a snowstorm or emergency of some kind, that never happens!

After America’s imitation of Rasputin (Twitter’s Jack Dorsey) opined that we are heading for hyperinflation, it seems Jay Powell has finally admitted that we have an inflation problem that is not as transitory as he thought. But does anyone think he will do anything to curtail it? As Alasdair Macleod concluded in his essay this week, titled, “Waypoints on the road to currency destruction—how to avoid it,” “No democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin. These are some waypoints to look for on the road to their destruction:

  • Monetary policy will be challenged by rising prices and stalling economies. Central banks will almost certainly err towards accelerating inflationism in a bid to support economic growth.
  • The inevitability of rising bond yields and falling equity markets that follows can only be alleviated by increasing QE, not tapering it. Look for official support for financial markets by increased QE.
  • Central banks will then have to choose between crashing their economies and protecting their currencies or letting their currencies slide. The currency is likely to be deemed less important, until it is too late.
  • Realising that it is currency going down rather than prices rising, the public reject the currency entirely and it rapidly becomes valueless. Once the process starts there is no hope for the currency.

“But before we consider these events, we must address the broader point about what the alternative safety to a fiat collapse is to be: cryptocurrencies led by bitcoin, or metallic money to which people have always returned when state fiat money has failed in the past.”

Believing that cryptocurrencies will become nothing more than another version of fiat, I have to believe the most likely option will be a return to gold as socialist policies like the ones now being forced on Americans take place. In real life we see an example of how gold is now being used as money when a currency is totally trashed, as explained on October 20 in a Bloomberg column that stated the following:

“To fathom the magnitude of Venezuela’s financial collapse, travel southeast from Caracas, past the oilfields and over the Orinoco River, and head deep into the savanna that blankets one of the remotest corners of the country. 

“There, in the barber shops and restaurants and hotels that constitute the main strip of one dusty little outpost after another, you’ll find prices displayed in grams of gold.

A one-night stay at a hotel? That’ll be half a gram. Lunch for two at a Chinese restaurant? A quarter of a gram. A haircut? An eighth of a gram, please. Jorge Pena, 20, figured that eighth came to three small flakes — the equivalent of $5. After getting a trim one recent weekday in the town of Tumeremo, he handed them over to his barber, who, satisfied with Pena’s calculation, quickly pocketed them. “You can pay for everything with gold,” Pena says. 

“In the high-tech global economy of the 21st century, where tap-and-go transactions are the rage, this is about as low-tech as it gets. 

“Most of the world moved on from gold as a medium of exchange over a century ago. Its resurfacing in Venezuela today is the most extreme manifestation of the repudiation of the local currency, the bolivar, that has swept the country. After years of meddling in the economy by Nicolas Maduro’s socialist regime, the bolivar has been rendered almost worthless by hyperinflation. (Maduro just lopped another six zeroes off it this month.) 

“In its place, the dollar has become the de facto choice in Caracas and other major cities. Along the western border with Colombia, the peso is the dominant currency. It’s used in more than 90% of transactions in the biggest city in the region, San Cristobal, according to the research firm Ecoanalitica. Down on the southern border with Brazil, the real is often the currency of choice. And the euro and cryptocurrencies have their niches in parts of the country, too. 

“People simply stopped trusting the bolivar,” says economist Luis Vicente Leon, president of Caracas-based researcher Datanalisis. “It no longer fulfilled its function” as a store of wealth or a means of accounting or a medium of exchange. 

“Today, only the poorest Venezuelans — those who lack easy access to dollars or other currencies — still use bolivars. “People prefer any currency over the bolivar,” Leon says. In parts of southeastern Venezuela, that currency is gold.

The land there, a stunning world of table-top mountains and giant waterfalls that cascade into lush valleys, is loaded with the precious metal. The temptation of overnight wealth has lured generations of wannabe miners, searing the names of the region’s towns — El Callao and Guasipati — into Venezuelan folklore.  

The area is a violent, lawless place today, overrun by gangs and guerrillas. Shootouts with Maduro’s soldiers, who control many of the bigger mines, are common. And yet Venezuelans still come from all over, driven by a dearth of steady work after the decade-long economic depression. 

“The small-time operators of illegal mines typically pay day laborers in nuggets, so there’s plenty of bullion to be had. That steady supply, coupled with Internet reception that’s so shoddy that digital transactions are nearly impossible, makes gold the least-bad option for locals. 

“They use hand tools to break shards off nuggets and then carry them in their pockets, often wrapped in bolivar bills — one of the few remaining uses for the currency. Stores have small scales, but some shopkeepers and consumers feel so comfortable handling the metal at this point that they evaluate the flakes by sight.  

“To the uninitiated outsider, this sounds wild. How can authenticity and weight possibly be determined with a mere glance from someone untrained in the ways of mineralogy? Gold experts, though, back what the locals say: You just get a feel for it over time. 

“Gold is an element,” explains Juan Carlos Artigas, head of research at World Gold Council in New York. Unlike diamonds, which are hard to evaluate, gold “has intrinsic characteristics, and there are specific things you can look for, especially in smaller pieces.” 

“The use of gold is slowly expanding into nearby cities, including Ciudad Bolivar, the state capital nestled along the banks of the Orinoco. Miners regularly travel there to sell their bullion when they want to cash out, and stores in shopping malls exchange it for dollars.  

Hyperinflation“The price of a cup of coffee in bolivars rose 1,737% in the past 12 months. But back in mining towns like Tumeremo, there’s little need to carry anything other than gold. The owner of a small hotel in town — he’d only give his first name, Omar, out of concern for his safety — says he pays his staff with gold, using the flakes he is handed by customers. He charges half a gram a night for a room. About two-thirds of customers pay with gold, Omar estimates. He’ll also take dollars and other foreign currencies from those who don’t have gold on them. And what about bolivars? By law, he can’t say no, so he takes them reluctantly, he says, and then unloads them fast.

So there you see fiat currency becomes money when politicians destroy the currency. So when AOC and other Marxist politicians in America are chanting for untold trillions of dollars to be given away to illegal immigrants in exchange for consolidating power at the voting booths, don’t think for a minute it can’t happen here. It may not be tomorrow but keep in mind that when hyperinflation takes off, it happens almost in “a twinkling of an eye” once the masses lose confidence in the purchasing power of the currency, which is just starting to happen now. Perhaps far left billionaire Jack Dorsey sees something that most of his Keynesian/Marxist friends don’t see, and that is what Alasdair points out above; namely that, “Central banks will have to choose between crashing their economies and protecting their currencies or letting their currencies slide. The currency is likely to be deemed less important, until it is too late. 

In the meantime, the bullion bankers keep bombing price discovery for gold with their paper shorts, which, according to Alasdair Mcleod, should pretty much come to an end at the start of the New Year, when U.S. and London banks will no longer be able to engage in futures markets without very large-scale capital requirements that figure to make shorting gold and silver an unprofitable business. At some point here gold will have its day and we will look back on this time as when we should have purchased more precious metals and more shares of the companies that will be mining gold professionally, not like the poor folks of Venezuela. Given that the rising powers of China and Russia are building their gold reserves dramatically in preparation for the dollar’s demise, it seems that day may now be very close at hand. Time will tell. The average London PM Gold Price Fix for the month of October ended at $1,776.85, just $0.40/oz. lower than the September average. So perhaps gold is finding a bottom here? The 20-month average gold price at the end of October stood at $1,803.35 and the 40-month average is $1,581.28.

Until the dollar system really begins to break down, Michael Oliver makes a good case that the gold and bonds tend to move together. At some point, when confidence in the system is lost, gold will soar and bonds will tank. But Michael is suggesting that the T-Bonds are within ~1.75 points from breaking out, meaning rates will decline in the near term. Gold should then break out. The T-Bond needs to rise to 162 20/32. It closed at 160 20/32 on Friday. Regarding gold, Michael says that if it can close a week this quarter at $1,825, gold should start its next bull market.

But getting back to the idea of professional miners of gold. Russia and China and all the countries connected to China’s new Silk Road will soon be in the driver’s seat. The major adversaries to the U.S. being the likes of China and Russia have been building massive amounts of gold for a reason. They know instinctively what those poor folks in Venezuela know—that gold is money. At some point, when fiat breaks down as it seems destined to do now at an accelerated rate of speed, gold will retain value and fetch enormous amounts of fiat money.

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.