July 6, 2022

Why Higher Inflation And $5,000 Gold Are Inevitable

In his press conference on April 27, 2011, Federal Reserve Chairman Bernanke dismissed inflation worries, stating that “Our expectation is that inflation will come down and towards a more normal level”.   Should we believe him?  Not if you want to preserve your wealth and here’s why.

Chairman Bernanke has a perfect record of making inaccurate economic forecasts.

  • Bernanke, March 2007, prior to the historic housing crash said,  “At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
  • Bernanke, February 2008, prior to the banking crisis that almost resulted in the collapse of the entire U.S. banking system  said, “I expect there will be some failures. I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”
  • Bernanke, June 2008, prior to the worst recession and job losses since the 1930’s, said the danger of the economy falling into a “substantial downturn” appears to have waned.

Even if the Fed was able to keep inflation at a “benign” rate of 2% a year, the long term effects on savings are devastating.  Over ten years, a 2% inflation rate reduces the value of $100,000 to $82,034, resulting in an 18% loss in purchasing power.

According to the Bureau of Labor Statistics, inflation averaged 3.4% since 1980.  At the beginning of 1980, one dollar had the same purchasing power as $2.86 at the end of 2010.

The cost of living has spiraled upwards since the early 1970’s, correlating perfectly to the point at which the value of the dollar was decoupled from gold.  In 1971, the United States stopped exchanging dollars for gold to foreign official holders of dollars and the dollar gold standard was officially ended in 1973.

The Fed’s policy of pushing easy credit for the past 30 years to fuel economic growth has left Americans swimming in debt.  The housing collapse and declining incomes have resulted in millions of mortgage defaults and underwater homeowners.  The Government’s attempt to bailout a collapsing economy and over leveraged banks and consumers has resulted in trillions of dollars in new debt and a $1.5 trillion deficit.

Government debt has exploded to the point where the solvency of the U.S. Government is now being questioned.  Large tax increases to erase the deficit would spin the U.S. into a deep recession.  The President and Congress lack the political will to cut spending.  The U.S. has spent and borrowed itself to the eve of financial ruin and must “inflate or die” at this point (see Why There Is No Upside Limit For Gold and Silver Prices).

The Fed, with the experience of two money printing campaigns already under its belt, will have no problems extending this practice.  As Bernanke noted in 2002 before he became Fed Chairman, “The U.S. Government has a technology, called a printing press, that allows it to produce as many U.S. dollars as it wishes at no cost”.

The Fed’s cheap money policies and concerted efforts to debase the value of the dollar are just beginning, and that means the biggest move up in precious metals is still in front of us.  My minimum long term forecast for gold remains at $5,000 per ounce and silver at $170 per ounce.