Gold Still Beats Inflation

So what’s behind the jump in prices?

How “transitory” is it, really?

And what does it mean for investments like currencies and precious metals?

Shortages Everywhere

There’s a very “Econ 101” quality to the current inflation spike. It’s largely driven by simple supply-and-demand factors.

For example, wages are rising rapidly due to a severe labor shortage across the US.

Generous pandemic-era unemployment benefits and a hiring-happy service sector are giving many workers — particularly lower-income ones — the ability to stay home, or to be choosier than normal about what kind of work they accept.

Case in point, the quits rate is higher than it was before the pandemic.

 

 

Those emboldened workers who are less desperate for a paycheck than usual are demanding higher wages — and ultimately, those costs are being passed to consumers in the form of higher prices.

Shortages of vital manufacturing inputs, such as plastics and semiconductor chips, have also driven up the prices of goods.

And yes, the government and Federal Reserve have printed trillions of dollars in rescue and bailout money.

Inflate Your Account

Taiwan Semiconductor (NYSE: TSM), a “bottleneck firm” that produces some 92% of the global supply of sophisticated semiconductor chips, has been hobbled in recent months by pandemic-related staffing shortages, geopolitical risks related to an increasingly-aggressive Beijing, and a long backlog.

Its production slowdown has made it more difficult to manufacture almost anything with an “on” switch — and in the process, has contributed to upward pressure on the prices of such goods.

In sum, all of the upward pressures on prices seem to be persisting, even as COVID-19 infections fall across the developed world.

And that implies that said upward pressures could be with us for some time, especially because there are fundamental drivers like the “electrification of everything” driving demand for base and battery metals.

So if this inflation spike is not — as the Fed said until recently — just a blip... how should investors respond?

 

What Rising Inflation Means for Gold — And the Dollar

Needless to say, inflation isn’t good for people who like to hold a lot of cash. Or for people who don’t have a lot of other investments that can outpace inflation.

The global money supply has been expanded by 26% in the past two years.  

That has continued to erode the dollar. But look what has “inflated” at exactly the same pace as money supply. Gold is up 26% in the same time.