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Bridgewater's inflation warning: 'It starts to look a bit like the 70s and the oil shocks'

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(Kitco News) Bridgewater Associates is warning investors that inflation will not be transitory and central banks worldwide will be powerless to contain price surges without hurting the economy.

"We're in this situation where you still have this inertia from demand, it is pushing up against constrained supply and that has pushed inflation up," Bob Prince, co-chief investment officer at Bridgewater Associates, told Financial Times. "And while the consensus is that that will be very transitory and bounce right back, we don't think so, because there is plenty of inertia from that spending to continue and it's just not going to be that easy to resolve these supply constraints, particularly as Covid remains an issue."

The statement comes as the world faces surging energy prices and potential shortages amid intense competition for natural gas supplies. The U.S. Treasury market is pricing all of this in, with the 10-year yield rising to four-month highs on Friday.

"It starts to look a bit like the 70s and the oil shocks," Prince added. "Raising interest rates isn't going to increase oil supply."

According to Prince, central banks are powerless in the face of more permanent inflation pressures because the only solution would be to raise rates significantly, which hurts the economic recovery.

"If there is inflation, the Fed is in a box because the tightening won't really do much to reduce inflation unless they do a lot of it, because it is supply driven. And if they do a lot of it, it drives financial markets down, which they probably don't want to do," Prince said. "Deciding between the lesser of two evils, what do you choose? I think most likely you choose inflation because you can't do much about it anyway."

This problem is already being considered by the Bank of England, which could raise rates as soon as this year in an attempt to control inflation.

Money markets are currently pricing in a 15 basis points rate hike by the Bank of England at its December meeting.

"I'm not in favour of using code words or stating our intentions in advance of the meeting too precisely. The decisions get taken at the proper time," the Telegraph newspaper quoted Bank of England policymaker Michael Saunders as saying on Saturday. "But markets have priced in over the last few months an earlier rise in Bank Rate than previously, and I think that's appropriate."

The potential of tighter monetary policies ahead is one of the reasons why gold prices have been stalling, according to many analysts. But this has not been a problem for bitcoin, with JP Morgan telling its clients that institutional investors prefer bitcoin as an inflation hedge over gold.

"The re-emergence of inflation concerns among investors has renewed interest in the usage of bitcoin as an inflation hedge," JPMorgan said last week. "Institutional investors appear to be returning to bitcoin perhaps seeing it as a better inflation hedge than gold."

At the time of writing, December Comex gold futures were trading at $1,758.60, up 0.07% on the day, while bitcoin was near daily highs of $57,561.53, up 3.89% on the day.

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