Massive Inflationary Pressures Will Lead to Uptrend in Gold

I recently came across an interview with David Swensen, the legendary manager of the Yale endowment, in the Wall Street Journal.

Here's the intro, by writer Craig Karmin:

He isn't a household name. But as the Yale University's endowment's chief investment officer for two decades, David Swensen has earned a reputation as one of the world's savviest and most successful investors.

He pioneered an approach that de-emphasized stocks and bonds while embracing less-traditional fare like hedge funds, private equity, and oil and gas. During his tenure, Yale has had an average annual return of 16% for the past 10 years through June, compared with a 2% average for the Standard & Poor's 500-stock index. Yale's assets more than tripled over that period to $23 billion, trailing only Harvard University's in size.

Even though the Yale endowment has been hammered in this financial crisis -- it's off an estimated 25% -- this is the first losing year since Swensen took over in 1988.

Here's what I found particularly interesting, especially considering the source:

WSJ: Looking ahead, what investments do you like?

Mr. Swensen: Distressed securities are one of the most interesting opportunities for institutional investors. But returns won't come right away because the credit markets are fundamentally broken. TIPS [Treasury-Inflation Protected Securities] are pretty attractively priced. They promise reasonable returns, and protection against inflation is really important. We may not see it in the next year or two, but the government's massive fiscal stimulus can't help but produce massive inflationary pressures. Stocks also look a lot more attractive than they have for a long time. We prefer higher-quality companies with low leverage.

I've highlighted the critical sentence, which is a fairly obvious conclusion given the current economic backdrop, but nevertheless when gold is mired in one of its corrective periods it's easy to lose sight of the underlying story that will drive gold for years to come.

The U.S. is already saddled with a ridiculous amount of debt, and on top of that the Fed, Congress, and the Treasury have just banded together to generate "massive fiscal stimulus" which will create "massive inflationary pressures."

And this will lead to a massive up trend in gold.

Swensen makes a great point that we may not see this inflationary effect right away, as there is frequently a significant lag between the implementation of monetary policy and its effect on markets. After all, financial markets are non-linear systems, so even though we'd like to see a nice and tidy linear relationship between high inflation and gold, it never ends up being that simple.

But we do have the necessary investment theme in place to drive gold well into the $1,000s, and perhaps even to $2,000. It's just going to take some time for this theme to gain some traction.

I don't think we're going to have to wait too much longer from here, as already there is a highly bullish pattern developing on the monthly chart.

This monthly chart looks extremely promising, as the big correction from $1,033 to $681 has generated a huge amount of available energy for the next hyper-growth period, as evidenced by the monthly fractal dimension moving back up and over 55.

In fact, as soon as gold breaks above the high of the initial surge higher -- at $890 -- then we'll know that the next big up trend is off and running.

In the short-term, gold is not looking so good, as this has been quite a bearish short-term consolidation pattern.

Generally when a market goes sideways right at the lows then it's setting up the next drop. The last drop carried gold down about $50. If gold were to have a similar drop of around $50 now then it would take prices right down to the target for this correction at $772.

So unless gold makes a strong move back over $840 -- which looks unlikely at this point -- then we should continue to anticipate a drop down to $772, where we'll look to get back into long positions.

A subscription to the Fractal Gold Report will give you access to daily updates on this very promising developing pattern in gold.

Comments

[Hefaistos:]

All this argument is built upon the expectation that the bailouts and stimulance packages will kind of overstimulate the economy, and within a couple of years build these inflationary pressures.
I would like to take the contrarian view: What if this crisis and recession leads to much bigger losses of economic activity than any 'packages' can provide? In that case, we will have a deflationary development continuing for some time, and gold will not be a good investment. Also, long-term bonds will not be a bubble.

Jan 15 08:22 AM

[Walter1234:]

I would just like to know where the inflationary pressure on wages is going to come from...

Jan 15 08:44 AM

[Conan the B...:]

I would like to see the application which created the above charts Backdated to reflect the 1977 to 1982 time frame.

The acceleration of inflation and what the indicators were pointing to when gold was about to enter a 20 year bear market.

There is no comparative view. No way to assess the success or failure rate. IMO

Jan 15 10:16 AM

[OldLimey:]

I tend to the view that if a government wants inflation, it has the power to create it. Absent debt forgiveness on a fairly massive scale (the next rabbit out of the Obama hat?), it's difficult to see how the US can get out from under its household debt burden other than by inflating; the same is true of the Federal debt, although in this case forgiveness is not on the table. (Pretty much the same applies in the UK, which is doubtless why the BOE has just been empowered to stop publishing its weekly balance sheet.) I would therefore think there is an argument that the US and UK governments will do whatever it takes to inflate.

My bet would be that they will succeed, which is why there's an argument for holding gold as a small part of any long-term portfolio by way of 'insurance'. However, the global economy does indeed look dire and it would be to say the least 'courageous' at this point to go heavily into precious metals.

Jan 15 10:52 AM

[Merigolden:]

Current events are laying a foundation for inflation, and these events are playing out all around us right now. Inflationary pressures must build, the only question is when we will enter that phase. I had already totally underestimated deflation, thinking a feeble dollar would run up the price of gold. As they say, live and learn! But the bottom line...I think David Swenson is on the money.

Jan 15 10:54 AM

[Larry House:]

Good points in the article, and good points by hefaistos. We must be very careful in trying to call trends when they haven't yet started. Keep your powder dry and your eyes and ears open.

Jan 15 12:05 PM

[Conan the B...:]

hefaistos: any relation to Vulcan, as in Hephaistos?

Anyway, given that everything appears to be moving at an accelerated pace, wouldn't that imply that a resolution albeit temporary, could occur within say 18 months rather than 18 years?

My fears are related to the attempt to undo what has been done and is yet to be done to quell the current crisis.

Jan 15 01:05 PM

[Conan the B...:]

Hear ye, hear ye:

looking for gold bars and ingots? Can't find any?

BullionSupermarket.com is the place to visit.

Its a compendium of the offerings on Ebay, discounts available.

Jan 15 01:55 PM

[silverwood:]

Does anyone think long term deflation has any benefits to governments in todays global market place? short term deflation does serve a purpose to correct the speculative excesses. In my opinion this has been mostly achieved. Re-inflation will be the goal of the World's central bankers. While this process takes place over the next several years, central bankers will manage perceptions, because gold is their enemy. They will attempt to fool the masses to keep them from using gold as a wealth preservation tool. Some of those who are not positioned in gold already at some point will realize that inflation causes a loss of wealth and it will be this realization that will overwhelm the perception managers and drive the price of gold to new heights.

Jan 15 02:56 PM

[the ilster:]

I keeping hearing that! WHEN? I think we are in a long period of deflation before we see any inflation.

Jan 15 07:09 PM

[TechGuy:]

Siggy Wrote:
"I would just like to know where the inflationary pressure on wages is going to come from..."

As the Gov't spends more its needs to consume more savings from around the globe. All this spending will eventually exceed the amount of money that can be invested in US treasuries. This will lead to a bond crash, and devaluation of the dollar. The US has been running trade deficits for decades and need to import just about everything. When the dollar is devalued, the prices of imports will soar causing inflation.

Consider that during the 1970's we had stagflation. Unemployment was soaring but so was inflation because of rising import prices. The same will happen again, even if the US economy is in a depression. Also look at countries that had massive currency devaluations or defaulted on debt, such as Argentina, England and Germany during the 1920 when their currencies were devalued.

Jan 15 08:47 PM

[Conan the B...:]

Silverwood: Over time, you will be proven right. That's my opinion.

When will this Inflationary time frame begin?

How long will it take for the negative Headline PPI and CPI figures to turn positive again?

Jan 15 11:13 PM

[Trinitymaster:]

Even if you're 100% correct, there is still no guarantee of a positive outcome.

1) People who invest in Gold securities have the mistaken impression that they actually own that much gold. That's like buying Ford stock under the impression that you now own part of their factories.

2) Gold (usually) goes up during periods of inflation-
BIG FREAKING DEAL! Everything else goes up as well.

3) Rich people who admire Gold are the ones that give gold its highly subjective value. Case in point: Amber and aluminum were once considered more valuable then gold. A quick glance at the history books should also remind people of how valuable spices once were.

Jan 16 02:25 AM

[nmelendez:]

1) People buy stocks/goods on account they will increase in value and hence maintain or improve on your investment. There is only so much gold and silver available. What happens when you run outta physical? You go to the next best thing, the miners!
2) The objective is not to hoard the gains, but to buy cheap and sell high. Nothing always goes up or always goes down, it cycles and you take advantage of that cycle. When gold becomes extremely expensive you sell it and buy cheap tec/healthcare stocks.
3) Everything has an intrinsic vaue. A good salesman knows how to sell you what you do not need by making it appear more desirable. Individuals are smart but people in general are gullible.

On Jan 16 02:25 AM trinitymaster wrote:

> Even if you're 100% correct, there is still no guarantee of a positive
> outcome.
>
> 1) People who invest in Gold securities have the mistaken impression
> that they actually own that much gold. That's like buying Ford stock
> under the impression that you now own part of their factories. <br/>
>
> 2) Gold (usually) goes up during periods of inflation-
> BIG FREAKING DEAL! Everything else goes up as well.
>
> 3) Rich people who admire Gold are the ones that give gold its highly
> subjective value. Case in point: Amber and aluminum were once considered
> more valuable then gold. A quick glance at the history books should
> also remind people of how valuable spices once were.
>

Jan 16 11:03 AM

[FreddieBoy:]

We may be in a Japanese style liquidity trap where monetary easing and massive Government stimulus have done NOTHING in 15 years. Inflation may not happen here either, at least for a generation.

Jan 17 08:06 AM

[User 367532:]

Sorry Mr. Nichols but you have lost all credibility with your completely wrong predictions based on your "fractal analysis" last year....Your absolutely 100% dead wrong predictions last year on the short recession and the "relentless higher" S&P really makes me doubt your fractal-based predictions (I'm sorry but if that isn't just a PR buzzword to basically say technical analysis, then I don't know what is)....

From your article in April, 2008:
"a rally up to SPX 1440 can be expected. Once the SPX breaks over 1440, it should start a self-reinforcing upside cascade that brings in billions of dollars from the sidelines, pushing the SPX relentlessly higher. "

Mar 01 11:53 PM

[Bruce Pile:]

Mister 367532, you refer to David Nichols' April '08 article to come to your conclusion of "fractal is full of crap". But if you examine the article carefully, you see that he was basing his call for a short recession and higher market to year end on some things other than fractal analysis. All he was predicting with fractal for the SPX was a climb in the short term to around 1440. Then he was assuming that the other indicators he was discussing would take over from there and would result in a quick recession end and a good market the rest of the year. Well, he was way wrong on that last part as we all now know, but what was the result of the fractal part of the prediction? Check it. The SPX did in fact rise over the next two months to his 1440 mark, where it turned on a dime down into the debacle. It was only his other non-fractal analysis that was full of crap.

Sep 23 05:03 PM