Inflation Is Back, And Investors Are Again Turning To Gold

March 1, 2017

Inflation

The history of financial markets reveals that the U.S. dollar and gold are negatively correlated – that they almost always move in opposite directions. As a result, since stocks are tied to the greenback, they too are negatively correlated to gold. Believe it or not, though, gold and stocks have been climbing higher together this month along with the dollar.

Halfway into February, stocks, gold bullion and the dollar are all experiencing 1% spikes. This simultaneous climb has only occurred in two previous months in the past ten years (in March, 2013 and February, 2010).

More often than not, a strong dollar is bearish for gold. During the past five years, gold has fallen an average of 2.2% when the dollar index is up by a percentage point or more.

But it appears gold and the S&P are now climbing on the expectation of inflation to the tune of around 1.9%. As one might expect, the anticipation of inflation paves the way for the Fed to hike rates more quickly, a development which, in turn, is persuading investors to increase their holdings of the shiny metal.

There can be little question that consumers are now paying higher prices for goods and services. Given a 0.6% spike in the Consumer Price Index last month, the annual rate of inflation jumped to a five-year high of 2.5 percent. Though not yet on a par with the inflation rate increase of the Great Recession, consumers are beginning to feel the squeeze in their household budgets. Rising prices in gasoline, apparel, and transportation all reflect this increase.

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The costs of producing consumer goods, the producer price index, spiked by 0.6% last month. This is a clear sign that consumer price increases will be with us for a while.

A certain amount of inflation can actually stimulate an economy. Still, the last ninety years are rife with notorious examples of hyperinflation that proved devastating to some nations’ economies. In the years 1921 through 1924, for instance, the German mark became essentially worthless.

As another example, years after its confiscation of private landowners’ farms in the 1990s, Zimbabwe’s currency became horribly inflated. A restroom in South Africa found it necessary to post a sign in a restroom that read “Toilet paper only to be used in this toilet. No cardboard, no cloth, no Zim Dollars, no Newspaper.”

More recently, in Venezuela, the relentless debasement of the bolívar has led to a projection of 1600% inflation in 2017.

While here in the States, we have nowhere near these kinds of inflation problems, we need to prepare ourselves for at least some inflation and the subsequent debasement of the U.S. dollar. History shows the best way for private investors to protect their portfolio against the declining value of the US dollar is to accumulate physical gold.  One way to do that is to consider moving a portion of your investments into a Gold IRA. To learn more about this option, you can request a Free Gold IRA guide here or call 800-777-6177 to speak to a Fortress Gold Group representative.

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In 1933 President Franklin Roosevelt signed Executive Order 6102 which outlawed U.S. citizens from hoarding gold.