Screw-flation and the Gold Super-Spike

Montreal, Canada

The next phase of the gold bull market will take prices to levels unfathomed by the bears as a full-fledged currency crisis rocks the financial system. This is already happening before our very eyes as the debt-infested West grapples with the debt super-cycle amid austerity in Europe and out of control spending in the United States.

To date, the U.S. dollar and EUR bear markets have been controlled declines. The dollar has been declining since 2001 against just about everything while the EUR has been going down vis-à-vis gold since 2005. Until this year, even the Swiss franc has been declining against gold since 2005.

Unlike silver and palladium, gold prices have not enjoyed a super-spike phase. And that’s great news to gold-bugs because the eleven-year bull market has thus far been a controlled affair without dramatic moves up or down. Gold has not logged a losing calendar year since 1999.

The bull market might be somewhat uninspiring this year as the gold price hovers around $1,500 to $1,550 after hitting a nominal record high in April. But boring bull markets are the best. This one has been measured and that’s just fine with me.

Yet I suspect that gold’s greatest gains still lie ahead as another round of asset purchases and accommodative monetary policies come to fore in the OECD. Most pundits believe Bernanke will hand over the economy to its own devices this summer; I highly doubt it.


The global economy has weakened once again since April with China and other growth engines in the emerging markets losing momentum. Inflation has been running hard in these countries and central banks, for the most part, remain behind the inflation curve. Real or inflation-adjusted interest rates in Asia remain negative.

In the West, the ongoing cycle of debt de-leveraging or the credit crisis hangover, remains in force, draining the growth cycle and inflicting pain on the middle class as jobs remain hard to find. Governments need inflation. The ECB is lost as the Germans fight for higher rates while the rest of the EMU struggles with asset deflation. It’s a nightmare scenario.

It’s very possible that the United States and even Europe will commence another round of asset purchases this fall or next winter, if the global economy heads into a double-dip recession.

A toxic mix of declining housing values (deflation) and high inflation for goods and services is causing “screw-flation,” or an environment of falling inflation-adjusted incomes and the rising cost of living. This is not what we saw in the 1970s, but it’s sure ugly. The poor, unsuspecting man on the street is just beginning to learn what this means. The implications are a loss of purchasing power and the “beginning of the end” of the post-WW II American Dream.

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