Earlier this month, the Federal Open Market Committee released its latest statement regarding the economy. Although there were some differences in the November statement, the Fed’s view on inflation is consistently different from reality. As consumers already know, inflation is on the rise. Protecting themselves by allocating a portion of their portfolio in gold may be the best decision one can make for the next several years.
In both the September and November statements, the Fed states, “Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.” However, the reality is that inflation is not moderating. Using the CPI data from the Bureau of Labor Statistics, the following is the year-over-year increase in consumer price inflation from January thru September of 2011: 1.7%, 2.2%, 2.7%, 3.1%, 3.4%, 3.4%, 3.6%, 3.8%, and 3.9%. There is clearly an uptrend in consumer prices. Due to methodological shifts in government, the current inflation being reported is depressed. According to Shadow Stats, if inflation were calculated using the methodologies in place in 1980, the current CPI would be over 10%. Higher inflation rates are also reflected in this year’s Thanksgiving feast.
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On Thursday, the American Farm Bureau Federation released more inflationary data that will weigh on consumers. According to its most recent report, the cost of Thanksgiving dinner will be 13% higher this year than last, as prices increased for everything from turkey to green peas. A meal for 10 people will rise to $49.20 this year, up from $43.47 in 2010. It is the biggest increase in 20 years. Turkey was the most expensive item on the report, and also had the biggest gain, with a 16-pound bird increasing by 22% to $21.57. The Farm Bureau’s survey of Thanksgiving foods shows a 17% increase in the price of frozen green peas, a 16% increase in the price for a 30-ounce can of pumpkin-pie mix, a 15% increase for a half-pint of whipping cream, a 13% increase for a gallon of milk, a 9% increase for a 14-ounce bag of stuffing, an 8.5% increase for 12 rolls, a 2.9% increase for fresh cranberries, and a 2.2% increase for three pounds of sweet potatoes. Maybe the Federal Open Market Committee prefers to skip Thanksgiving dinner and is unaware of the price increases?
Inflation reflects an erosion of purchasing power in the dollar. As inflation rises, the dollars in your pocket purchase fewer goods and services. Oxford Economics, one of the world’s foremost global forecasting and research consultancies, builds a case on how to protect your purchasing power in a high inflation environment. In the face of rampant inflation, where the CPI number hits as high as 12.1% in 2014, gold outperforms all other asset classes in 2011-2015. The report states, “The performance of gold is boosted by high US inflation throughout the forecast period, coupled with a weaker dollar and often-negative real interest rates.” Negative real interest rates do not appear to be leaving the market anytime soon. Fed Chairman Ben Bernanke, as made it clear that he intends to pursue a zero interest rate policy through at least mid-2013. Other central banks around the world continue to cut interest rates as well. Last week, the ECB cut interest rates to 1.25%, just three days after receiving a new leader. On Wednesday, Brazil, which is still among the highest rates in the world, reduced its overnight lending rate by half a percentage point.
In conclusion, the Oxford Economics report finds that cash performs relatively poorly due to lax monetary policy, and bonds perform badly, initially due to high inflation steepening the yield curve and subsequently to the delayed monetary tightening. Equities perform better than all other assets, except gold. Although central banks may be in denial about inflation, investors should strongly consider protecting themselves from rising inflation and lax monetary policies by allocating a portion of their portfolio in gold.
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