Central banks at a crossroads and any move to deal with rising inflation will only be cosmetic - Degussa
(Kitco News) - Central banks are at a perilous crossroads as they must deal with rising inflation pressures and make sure that the global economy remains strong.
In a recent report, Thorsten Polleit, chief economist at Degussa, said that it's only a matter of time before investors turn back to gold as central banks try to walk a precarious line between economic growth and inflation.
"The exchange value of gold and silver cannot be permanently manipulated downwards by central banks, especially not when times get really hard. What is more, physical gold and silver do not – in contrast to bank deposits – carry a counterparty or default risk. Last but not least, physical gold and silver make the investor independent from the financial system, its trading hours, settlement and delivery procedures and costs," he said in the report.
For most of 2021, investors have avoided the gold market as central banks, led by the Federal Reserve, look to shift their monetary policies. The Federal Reserve is looking to reduce its monthly bond purchases before the end of the year. Markets also see the potential for the U.S. central bank to raise interest rates before the second half of next year.
These hawkish expectations are keeping gold prices trapped below $1,800 an ounce.
However, Polleit said that investors are starting to realize that the Federal Reserve has itself been trapped by its monetary policy. He explained that any meaningful tightening could prove to be disastrous for the economy and financial markets.
"It should be clear that a monetary policy of interest rate hikes and containment of credit and money supply expansion would be tantamount to an earthquake for the global economic and financial system – because the latest economic recovery has been driven by extremely low interest rates and a most generous supply of credit and money," he said. "If central banks meant business and were to combat price inflation by raising interest rates back to 'normal levels,' a recession-depression would be inevitable."
Polleit said that he expects any central bank tightening to be "cosmetic" in nature and that real interest rates are unlikely to see a material rise from their recent historical lows.
"Global debt levels are already crushingly high, and many borrowers could not survive in an environment of higher real borrowing costs," he said.
In the current environment, Polliet said that when it comes to rising pressure pressures, the best investors can hope for is that it doesn't spiral out of control.
Global debt levels are already crushingly high, and many borrowers could not survive in an environment of higher real borrowing costs.
"Adding physical gold and silver to your portfolio at current prices makes perfect sense to those long-term oriented investors who share the view that central banking has actually arrived at a crossroads – and those who believe that the most likely scenario is the inflationary regime continuing to push its limits," he said.