The US dollar has rallied over the last few weeks. The dollar index closed above 93 on May 8. This represents about a 5% increase from the low this year of just above 88. On the year, the dollar is up about 1%, although it is still off about 6% from its highs in 2016.
In his latest podcast, Peter Schiff called this a “bear market rally.”
There hasn’t been any good economic news that would explain the strength of the dollar.”
In August 2015, a photo of a man using a 2 bolivar note as a napkin went viral. It vividly illustrated how rampant inflation had devalued the Venezuelan currency to the point of near worthlessness.
Fast forward two-and-a-half years and things haven’t gotten any better for Venezuelans. In fact, they’ve gotten significantly worse. Today, Venezuelans are better off holding video game money than bolivars. According to an article published by Fortune, World of Warcraft tokens are seven times more valuable than Venezuelan currency.
The Federal Open Market Committee met last week. As expected, it left interest rates unchanged. But the FOMC made an interesting comment that indicates that it may be willing to “tolerate” higher inflation.
That might be all well and good for central bank policymakers, but just how willing are you to “tolerate” higher inflation?
The US economy is now technically in the second-longest recovery in history. If it continues another 14 months, it will eclipse the longest recovery, which took place in the 1990s.
As Peter Schiff pointed out in his latest podcast, the Federal Reserve pulled out all the stops in the 1990s to keep the recovery going. That set the stage for the dot-com crash and ultimately the Great Recession.
Now the Fed is doing it again.
Last month, US Global Investors CEO Frank Holmes offered three reasons he thinks the gold might hit $1,500 per ounce this year. His number one reason was rising inflation. In a recent interview on Bloomberg Radio, Holmes reiterated that high inflation looks good for gold in the near future. He also pointed out that whether you look at things from a long-term or short-term perspective, gold had done exactly what it is supposed to within an overall portfolio.
Inflation is low – so we’re told. But this simply isn’t true.
Now, it is true that the consumer price index (CPI) has remained relatively low. But rising prices aren’t in-and-of themselves inflation. In fact, we can have inflation without a corresponding rise in CPI – at least in the short-term. That’s exactly what we’ve had over the last decade. We’ve had rampant inflation, but it hasn’t manifested in broad-based rising prices – yet.
Last month, US Global Investors CEO Frank Holmes said he thinks gold may well hit $1,500 this year. He listed the specter of increasing inflation, a weakening dollar, and income growth in China and India as three reasons to be bullish on the yellow metal.
This week, Holmes appeared on CNBC’s Squawk Box and continued to make a case for buying gold.
Yesterday, we reported that some of the big mainstream players in the investment world, including Goldman Sachs, have suddenly gone bullish on gold. They aren’t alone. US Global Investors CEO Frank Holmes said he thinks the yellow metal might hit $1,500 per ounce this year.
Even with the headwinds caused by Federal Reserve monetary tightening, gold has had a pretty good start to 2018. It’s up close to 3% on the year. In fact, gold is one of the best-performing assets so far this year. As of March 23, gold had outperformed the dollar index, the S&P 500, US Treasuries and the Bloomberg Commodity Index.
The Federal Reserve followed its script yesterday and raised interest rates another 25 basis points. But the central bankers did surprise some people by hinting at just two more hikes this year. Analysts have been fixated on the possibility of four 2018 rate increases.
The Fed’s slightly more dovish tone on rate hikes sent gold climbing. The yellow metal gained about 1% in the aftermath of the FOMC meeting.
Nevertheless, even while dampening expectations of faster tightening, the Fed continued to talk up the economy. In fact, the central bankers project continuing rate hikes all the way into 2020. In his most recent podcast, Peter said the Fed sounded even more optimistic about the economy than it has in the past. He called it “all politics,” designed to maintain the illusion that everything is great.