Central bankers shoot for “subliminal” inflation – not enough to notice on a day-to-day basis, but enough to cause dramatic changes over the long run.
- Do central banks really follow their mandate of price stability?
- Central banks purchased 1,136 tons of gold last year, a 55-year high. It appears as though someone is hedging against their own inflationary recklessness.
- When inflation catches hold, when geopolitical strife reigns, when risk is revealed – gold is the place to go.
Plummeting Purchasing Power
There has been nothing “subliminal” about our recent inflation. It smacked everyone in the face. The pain of post-COVID inflation is particularly acute, although it’s just one small part of a decades-long destruction of purchasing power.
The chart below shows the cumulative impact of inflation on the dollar. The Bureau of Labor Statistics data goes back to 1947. One 1947 dollar has been reduced to seven cents of purchasing power (a 92.79% loss).
In other words, something that cost $1 in 1947 costs $13.87 today.
If you thought the Federal Reserve’s mandate of price stability compels them to keep prices stable, you would be dead wrong!
The Fed, along with every other central bank, aims for inflation. Right now, their target is 2% annually. The idea is that inflation remains subliminal – just below the threshold of consciousness – but high enough to stimulate “economic growth.”
Whether or not monetary-induced inflation can stimulate genuine economic growth is a matter of intense debate. One thing is clear: inflation adds up. You might be shocked to see the long-term impact of central banks’ money-printing schemes.
Let’s look at a few examples. The red line on each chart shows real performance (adjusted for inflation) since the year 2000.
S&P 500: Nominal vs. Real
The S&P 500 has risen 195% since 2000.
If you adjust this figure for inflation, performance is only 68%.
Dow Jones: Nominal vs. Real
The Dow Jones Industrial Index has risen 212% since 2000.
But if you adjust this figure for inflation, performance is only 77%.
Gold: Nominal vs. Real
The gold price has risen 590% since 2000.
But if you adjust this figure for inflation, performance is only 292%.
The “Perpetual Inflation” Mandate
Inflation has come off its highs. But will it stay down?
Who knows, there are still a ton of systemic issues that could serve as long-term drivers of inflation, including the unwind of globalization and the war against fossil fuels.
Not to mention, the price structure of goods and services likely has not fully adjusted to the excessive money printing during COVID (and perhaps even the Global Financial Crisis), meaning inflation could be a thorn in our side for a while.
Gold Demand Dynamics
2022 was a massive year for gold buying – especially from central banks. The World Gold Council reported that central bank gold purchases reached 1,136 tons, a 55-year high. Total gold demand jumped 18%, demonstrating robust demand from every corner of the market.
Most governments left the gold standard behind a century ago – they no longer need gold reserves to back their currencies. So why the sudden demand?
It appears as though someone is hedging against their own inflationary recklessness.
When Risk is Revealed
As it turns out, gold is not just a relic of our monetary past. Today’s unique challenges make gold more relevant than ever. When the financial system veers off course, when inflation catches hold, when geopolitical strife reigns, when risk is revealed – there is simply nowhere else to go.
Stocks? Bonds? Currencies? All these assets are twisted together in a complex web of risk that we will never fully understand. They all represent someone else’s debt; their value can disappear in an instant (as has been proven time and time again throughout history).
Does last year’s gold demand represent the strength of gold or the weakness of everything else? It doesn’t really matter – either way we should take note of whatever the central bankers are doing.
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As always, thank you so much for reading – and happy investing!