Why Precious Metals? Because these assets typically perform well in an inflationary environment, which we foresee in the future. As measured by CPI, inflation seems to be relatively tame right now; it is not likely to remain low for long. As you can see in the chart below, CPI has been running at about 1.2-1.4% in recent months.
Indeed, CPI is not very high, but let’s put this in context. Many prices, such as food, residential real estate, building materials, healthcare, and stocks are higher now than they were a year ago.
Some parts of the economy came to a halt, countless people lost their jobs, GDP fell off a cliff for a while, and all this time, we see many prices around us increasing. In a “normal” scenario, we would likely see deflation occur, but instead, we see the opposite.
The major central banks around the globe are the center of this phenomenon. Let’s focus on the U.S. Federal Reserve, the most influential central bank. Perpetual zero rate policy, multi-trillion-dollar backstops, and bailouts, coupled with “Q.E. unlimited” are causing the Fed’s balance sheet to explode. We see that the Fed’s balance sheet is nearly ten times higher than where it was before the financial crisis of 2008, and it has almost doubled just over the past 18-months alone (see the graph below).
Total Assets (In millions of dollars)
This central bank activity is unprecedented. There were expectations that the Fed could eventually “normalize” rates and unload its balance sheet post the 2008 crisis. However, this was proven to be wishful thinking. In late 2018 when the Fed attempted to reduce its balance sheet, we saw that the economy couldn’t grow in a quantitative tightening environment with rising interest rates.
We expect the Fed’s balance sheet to continue to expand further from here. Moreover, we don’t believe that the Fed will be able to shrink its balance sheet notably, nor will the U.S. economy withstand higher interest rates anytime soon.
What Should We Expect
If we see signs of inflation when we should typically be seeing deflation, what will happen when the economy starts to expand notably later in 2021 or 2022?
It’s clear that inflation is likely to increase, and the Fed will find it challenging to employ higher interest rates to fight inflation. Higher interest rates will cause a recession or possibly a depression if they lead to widespread defaults when the enormous debt load becomes too costly to manage.
The Bottom Line
There is not much that the Fed can do to cool down inflation going forward without damaging the economy. The truth is, significant inflation could allow us to pay off the enormous amount of outstanding debt with worthless dollars. This economic situation is very bullish for precious metals and other real assets and potentially dangerous for many financial assets and fiat currencies.
iSectors® Implementation: The iSectors Precious Metals Allocation was the best performing iSectors allocation model in 2020. The model owns funds that invest in gold, silver, platinum, and palladium bullion. Another iSectors allocation model that includes precious metals is the iSectors Inflation Protection Allocation. In addition to precious metals, this allocation model also holds REIT’s, Commodities, and TIPS. These iSectors allocation models can help hedge the risk that inflation will destroy the purchasing power of client savings.
If you are a financial advisor who wants to learn more about reducing the risk of inflation in client portfolios, please contact Scott Jones at 800-869-5184 or [email protected]. Alternatively, you can register on our website www.isectors.com to review information on the iSectors Precious Metals Allocation and iSectors Inflation Protection Allocation.
iSectors strategies are only available through advisors.
Individual investors can contact Scott Jones for a referral to a recommended iSectors advisor that can help you determine the best iSectors asset allocation for your portfolio.