When we look at some critical events over the last 100 years, the evidence for an inflationary period is clear. While stocks are trading at record highs, consider that commodities are often at the same time undervalued. History repeated itself to show this in 1972 (nifty fifty stock bubble) and 1995 (dot-com bubble). As we see capital move into high growth and low valuation, investors respond. It is generally a time to part with fixed-income securities and deflationary growth equities and reconsider hard assets. The years’ worth of declining industrial materials, agriculture, and energy coupled with these historical stock/bond bubbles are strong evidence for impending inflation. It is apparent on the commodities front.
Pre- & Post-Covid Events
Pre-covid, jobs were returning, and the economy was near full growth potential even while debt remained high. Inflation has remained in check, but again we must look at history. Shortages in the reserve currency, post-covid economic downfalls, and continuing stimulus packages may trigger rising commodity prices that could trickle into the global supply chain and truly impact living standards. There is no doubt the global economy may be at risk of commodity-supply inflation similar to what we experienced in the 1970s.
The Bloomberg Commodities Index is keeping watch on a 12-year resistance line that may cause a shift in small investments. Both aging demographics and advancing technology may lead to deflation even though consumer prices have remained stable. This is due in part to depressed commodity prices that may be about to change. When this happens, investors look at gold and silver. These metals are fast becoming highly demanded and, at the same time, short in supply.
According to google search engine, the price of gold has increased 28% within the past 12 months of year 2020 and silver also increased 47%. Furthermore, the gold supply issues are due to a shortage of gold discoveries and the expense involved in gold mining. It is a 30-year decline trend, but mining companies are reacting in efforts to reverse this trend. Gold and silver are continually rising, and resulting cash flow is high—more than ever in the last 25-year period.
Increasing Gold & Silver Prices and Demand
Increasing prices are due to several factors:
1) Central bank debt monetization
2) Printing of money to address the debt burden
3) The attraction by investors due to post-pandemic uneasiness
4) Declining real interest rates
Looking at gold for example…Gold prices and demand are on the rise, with a high at nearly $1,918 a troy ounce in December 2020. History shows us that gold underperformed during the period from 2011 to 2018 when money was printed regularly. When we experience eventual imbalances in the economy, rising commodity prices, and real-world inflation, traditional assets are often devalued.
Printing money through central banks is frighteningly accepted as a way out of global debt burden, highly impacting worldwide GDP as much as 365%. This near-World War II level deficit may come at a severe cost to traditional investors. The Fed, along with the central banks believe they can exceed a 2% inflation target at full employment expense. While rising inflation is driven by consumers’ and investors’ expectations and actions, there is no doubt they may begin to act upon it.
Historical Evidence for 2021 Inflation
There is a strong possibility that inflation will rise at a faster rate than interest rates. This can drive investors away from overvalued stocks/credit into commodities such as precious metals and oil. This was the case at three different times in history (including the two noted above):
- During the dot-com bubble in the mid-1990s – the NASDAQ declined 78% over 2-1/2 years, at which time gold stocks went up over 7 years. Energy and industrial commodities increased.
- During the 1974 bear market – the S&P 500 declined 50% over 2 years, gold mining stocks increased 5-fold, and oil prices skyrocketed during the 1973 Arab Oil Embargo.
- Post-Spanish flu period 1918-1919 – this health crisis limited the industrial side of the economy and lead to raw materials shortages.
This caused commodity inflation and a rise in wholesale prices even as the pandemic healing was taking place. Grocery stores hoarded inventory to sell at a higher price, in which case the government was forced to intervene before a negative consumer impact. The cost of living surged, and labor unions protested for higher wages. Inflation rose above 20% in 1920. The Dow Jones Industrial Average declined from 1920 to 1921.
An Opportunity for Gold
It is a time when investors are beginning to see gold as a solution to impending inflation, and the evidence is clear as gold and silver prices rise and supplies shrink. People are counting on the gold mining industry to send their junior explorers after new gold and silver deposits. Even with the 2020 stock price performance rebound, there is much more unexpected performance to surmise. What is certain is that the precious metals mining industry will provide valuable alternatives, especially those created from small-cap exploration, for shareholders.
At Reagan Gold Group, we offer gold and silver investment solutions that are essential in a weakened economy amidst a hopeful Covid-19 recovery, an uneasy political regime change, and a job market desperate to return to normal. Here, we guide individuals and significant investors to make critical decisions that impact personal and business futures. While government-backed fiat currencies sit in peril, potentially devalued due to impending inflation, now is the time to re-evaluate your investments. Don’t wait another day. A lot is going on. Forecasts show that gold will shoot to $3k per ounce by the end of 2021! Reach out to Reagan Gold Group and learn more about the upcoming bull market for precious metals.