It is time to buy gold and silver again as new central bank data shows that the European Central Bank and Federal Reserve have finally been successful in creating inflation. Whether they will now be able to control it is completely another matter, and buying gold to hedge against the very real possibility that they lose control is going to be the next big thing.
Oxford Economics has assembled data that shows ‘narrow’ M1 money in the eurozone expanding at the phenomenal rate of an annualized 16.2 per cent for the past six months. The wider measure of the money supply M3 is growing by the fastest rate since 2008, up 8.4 per cent in the same period.
US money supply
The Federal Reserve has quadrupled its balance sheet since the global financial crisis, pulling and pulling on a piece of string that never seemed to break. Now the brick on the end of that string may be about to fly into its face as M3 growth has returned to post-war averages, up around eight per cent so far in 2015.
Inflation is coming, like the cavalry coming over the hill in battles of yesteryear. Only its appearance in the nick of time can save the world from its debt mountains and a downward deflationary debt spiral. Anybody might think the central banks have been planning this all along, and yes that’s the obvious truth, except that it just did not seem to be happening.
Thank Mario Draghi at the European Central Bank for leading the charge with quantitative easing in the eurozone that has finally put the cat among the pigeons. Inflation is now coming home to roost.
Not for the first time global financial markets have been wrong footed. The bond bubble has bust as markets adjust to the new inflationary forces now in their midst. Bond yields are surging back around the world and any bondholders who bought at the end of the bubble are now deep underwater.
Bond crash coming
The bond rout is not over yet. Chair Janet Yellen has yet to sing. When the Fed does actually raise its key discount rate then bond markets will sell-off again. If historical precedent is anything to go by then stocks will not escape either: equities generally dislike inflation as input costs rise faster than they can be passed on in higher prices, and so profits suffer.
The asset classes that do gain from inflation are usually commodities and precious metals. Remember how oil and gold prices surged in the 1970s as inflation took off. That’s good news for the oil rich Middle East and precious metal investors but not many others.
HSBC says it is going to fire up to 50,000 staff in the near future and that maybe nothing compared to the scythe that will cut through the bloated global financial sector as this unwinds. Those on Wall Street pumping up bank stocks on higher interest rates really have gotten the wrong end of the stick.
No the bond rout ought to be a reminder just how wrong consensus opinion can be in financial markets and how the contrarians usually win in the end.