Bullion Bulletin: Listen to Grandpa Ben

Who’s ‘Grandpa Ben’? Ben once advised David Einhorn, who set up the US hedge fund Greenlight Capital, which is doing well this year and so far is up more than 20%.

Einhorn invoked his grandpa at a conference, where he said that the Federal Reserve is pretending it can tame inflation and that the price of gold is likely to go higher amid the current environment of rising prices. He thinks that the US Federal Reserve is “bluffing and not fighting inflation”. The reason Einhorn thinks the Fed is bluffing is that if it put up interest rates sufficiently highly to rein-in inflation, the resulting higher interest payable on the US national debt (now more than $30 trillion) would become unsustainable.

Paul Volcker, a former chairman of the Federal Reserve, showed in the 1970s that double-digit inflation could be crushed by very high interest rates – but only at the cost of a deep recession, which pushed up unemployment to more than 10%. In a febrile political context – President Biden’s Democrats are probably going to take a beating in the November mid-term elections – a recession is politically toxic.

With US consumer prices in May rising 8.6% on an annual basis and energy prices still climbing (crude oil is now forecast by commodity trading firm Trafigura reaching a “parabolic state”), it seems unlikely that the inflation peak for this year has yet been reached. And this isn’t even factoring in the extra costs that are inevitable if the world succeeds in moving to “net zero”; the BlackRock Investment Institute estimates consumer prices could rise by as much as 4% a decade from now if the transition costs to net zero carbon are fully passed on to households.

US consumers are certainly fearful – the renowned University of Michigan latest consumers’ survey suggested that consumer sentiment fell by 14% from May, reaching “its lowest recorded value, comparable to the trough reached in the middle of the 1980 recession”. Einhorn is merely saying what others are. Mark Carney, for instance, who ran the UK and Canadian central banks, has said the “long era of low inflation, suppressed volatility, and easy financial conditions is ending”. “Large structural forces pushed inflation down for the last 40 years… Those structural forces are now reversing”, according to Kevin Warsh, who was on the board of governors of the US Federal Reserve. Grocery prices rose by almost 12% on an annualized basis, the most since 1979.

Inflationary pressures remain in place – the continuing war in Ukraine is pushing global fossil fuel prices higher, the global grains output this year is likely to be 16 million tonnes lower than in 2021 (the first decrease in four years), and Covid-19 continues to stop-start the Chinese economy.

The “bluffing” Federal Reserve might be forced to “loosen” policy and accept an inflationary “spike”, said Einhorn, who continued: “At that point, it’s best to have some gold. That’s what Grandpa Ben taught me”.

Perhaps we all need an Uncle Ben.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.