(Kitco News) - Consumers continue to face elevated inflation pressures as the core Consumer Price Index for July showed an annual increase of 3.1%. However, this inflation is only a small part of a much broader picture of the weakening purchasing power of fiat currencies, which will continue to support long-term gold demand, according to one market analyst.
In a recent interview with Kitco News, Thorsten Polleit, Honorary Professor of Economics at the University of Bayreuth and publisher of the BOOM & BUST REPORT, said that gold and silver are on the cusp of important structural breakouts because of the unfettered growth of the paper money system.
“There is a desperate attempt to secure safe haven assets,” he said. “People are becoming skeptical of the purchasing power of all fiat currencies, and we can see this in the global gold market.
Not only is gold holding solid gains above $3,300 an ounce, but it is trading at record highs against the Japanese yen and near record highs against the British pound, euro, Canadian dollar, and Swiss franc, to name just a few major currencies.
“Global debt is rising everywhere, and this is driving inflation. It’s not just in the U.S. Government debt is rising in Canada, it’s rising in the UK, and it’s rising in Europe,” he said.
Polleit noted that in this environment, it is impossible for central banks to raise interest rates, as doing so would increase the servicing costs of all this debt, which in turn would dampen economic growth.
But this is just the start; Polleit said he expects that central banks will not only have to cut rates this year, but he also anticipates a return of financial repression and potentially yield curve controls.
Financial repression is an indirect way for governments to use private industry dollars to pay down public debts. A government uses subtle tools like zero interest rates and inflationary policies to reduce its own debts.
Polleit’s dovish outlook comes as the Federal Reserve has stood apart from most major central banks, maintaining a neutral monetary policy stance through the first half of the year.
Markets are now pricing in a 25-basis-point cut next month and see a 60% chance of two more rate cuts before the end of the year. While easing expectations have picked up in recent weeks, the yield on 10-year notes has remained relatively elevated, holding key support above 4%.
Polleit said it's not surprising that yields have remained elevated, as investors need to see a greater reward for the risk of rising debt. However, he added that he sees a limit for 10-year notes; he doesn’t expect the yield to surpass 5%.
Polleit said that the Federal Reserve is probably hoping that interest rate cuts to short-term yields will also bring down the long end of the curve.
“ If that doesn't work, if you don't get the long-term interest rate down, I think it's very plausible to assume that central banks will start purchasing once again,” he said. “ Once yields come down, you will see a further appreciation of the gold price. There is so much potential and momentum in gold that I expect we will see higher prices before the end of the year.”
Looking at the long term, Polleit said that he would not be surprised to see gold prices double in the next five to ten years.
