Gold Bugs Change Their Story


"Break-even inflation in U.S. . .at just 1.9% over the next 10 years."

Amendments are now underway to the story pushed by gold bugs. Gold hit record levels on the argument that the printing of money by central banks would spark inflation, or even hyperinflation.

The printing presses have certainly been at work. The U.S. Federal Reserve's balance sheet, after slow growth for 30 years, has almost tripled since 2007. The Bank of England's has multiplied by five. Even in Europe, where Germany's collective memory of wheelbarrows of money being valued by weight dominates policymaking, monetary policy is ultra-loose.

Unfortunately for the gold investment case, there is absolutely no evidence whatsoever of inflation. Quite the opposite. Break-even inflation in the U.S. is put at just 1.9% over the next 10 years by bond investors, and even that may be a half-point overestimate, according to the Cleveland Fed. German 10-year break-even inflation is just 1.5%. Government bond yields are tumbling, with the 10-year U.S. Treasury below 3% and the two-year at record lows; since inflation is terminal for bond returns, this does not fit the inflation story.

So the story moves to a new chapter: deflation equals inflation. That is, a move to deflation will prompt frantic monetary intervention, increasing the odds of hyperinflation.

On the surface, this makes sense. But with one Fed governor already warning of the dangers of more monetary stimulus, and the European Central Bank ending its unlimited one-year lending on Thursday, the political response may not be that quick. Any signs that deflation will be allowed to take hold would hurt gold as investors look for a new narrative (partially offset by gold's safe haven status, as deflation is sure to lead to fears of bank meltdowns). That would be a sad ending to the tale, particularly if inflation does eventually follow.

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