Email of the day - on inflationary expectations
Comment of the Day

July 28 2020

Commentary by Eoin Treacy

Email of the day - on inflationary expectations

Thanks to your good guidance, the month of July has (already) produced the best portfolio performance in my life-time of investing! The portfolio switch from NDX stocks to gold and silver stocks has been phenomenal (20.59% in one stock today).

Attached is a report from “Goldmoney” regarding future inflation that you have addressed in recent commentaries.  (Underlining in the article is mine) Could we expect a sudden change in the Velocity of Money to facilitate an inflationary outcome or will other factors cause inflation regardless of the VoM?

Eoin Treacy's view

Thank you for this interesting article and congratulations on taking opportunities in the market. Velocity of Money is a major component of inflation. The fact it has been falling for so long is one of the primary reasons we have not seen widespread inflation resulting from massive money printing over the last 12 years.

The missing ingredient in supporting credit creation and lending has been the inability of banks to participate. Instead they lodged most of the proceeds of liquidity creation with the Federal Reserve in return for a small but certain return. That helped to rebuild balance sheets but it also ensured credit availability to consumers was limited. The total of excess reserves of depository institutions held at the Fed is now $1.92 trillion.

The only way we are going to see inflationary pressures persist is if banks are of the opinion that they can earn a better return on the street than from the Fed. When economic activity picks up, following the end of the virus scare, there is going to be a lot of liquidity sloshing around. At that point central banks will have to significantly reduce accommodation or they will greatly increase the risk of inflation. If inflation picks banks will have little choice but to lend.

The argument Russell Napier has made is that governments are in the process of taking over banking sectors and will begin to instruct them to lend. Either way if the liquidity stays in the system as economic activity improves, we are certainly going to have an inflationary outcome.

Gold futures briefly touched $2000 today. Following such an impressive advance and proximity to such a big psychological number, some consolidation of recent gains appears likely at this stage.


Back to top

You need to be logged in to comment.

New members registration