Get Ready for Skyrocketing Inflation (And Gold), Says CIO

As the Fed swiftly acts to save the US economy, one financial expert predicts that inflation will a necessary component. Find out what this would mean for gold.

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According to Forbes contributor Bob Haber, the U.S. has wholly embraced Modern Monetary Theory (MMT), a concept that makes many an economist recoil. In its most basic definition, MMT is an amplified version of quantitative easing (QE) that essentially allows central banks to print as much money as they please and ostensibly offset the resulting inflation through taxing the wealthy.

While zero or negative interest rates and QE were already present around the world before the coronavirus, Haber notes that those loose monetary policies will soon seem moderate. He acknowledges that the Fed needs some tools to battle the unraveling recession, yet as the hyperinflated economies of Venezuela and the Weimar Republic show, uncontrolled money printing only moves in one direction.

In essence, inflation is the only way out of the existing economic woes that have combined with the latest blow to create a uniquely difficult situation. Ahead of the pandemic, the U.S. was already dealing with $23 trillion of debt and over $1 trillion of fiscal deficit, two issues that many considered unsolvable. Now, Haber expects the debt bubble to climb to $30 trillion by the end of 2020, paired with the likelihood of increased federal spending to stimulate the economy. To add, there is also an ongoing pension crisis that will hardly change for the better with recent developments.

To Haber, there is only one path for the Fed, and it is a clear one. The central bank has already printed $1.4 trillion over the past two weeks, with the Bank of America equating this to $1 million printed every minute. Evercore ISI estimates that the Fed's $5.7 trillion balance sheet, one that the bank was looking to reduce not too long ago, could double by July. If it does, it will represent 50% of the national GDP, a baffling contrast to the 5% it represented in 2008. As Haber notes, the only remedy for this is to wholeheartedly embrace inflation in order to make $1 trillion seem closer to $100 billion.

Just as the Fed has a single path of action ahead, so do investors looking to respond to the paradigm shift that has arrived. The average investor who previously held a gold allocation between 5% and 10% will need to reassess the landscape and consider increasing said allocation to 15%-20% as the money supply expands.

As Haber points out, investors haven't been waiting around for inflation to take its toll and have already jumped on the gold wagon to protect their wealth. When gold prices peaked in 2012 around $1,900, large funds held 82.5 million ounces of gold. Now, Bloomberg data shows that fund holdings have already climbed to 91.2 million ounces. Aside from commercial investors going long gold across the board, Haber also points out that mining companies have warned that the production of the metal has essentially peaked. Haber firmly believes that gold is not only primed to soar past its all-time highs, but also keep moving up so long as the Fed sticks to its ultra-loose policy.

Why You Shouldn't Doubt the Shiny Yellow Metal

Gold has been experiencing its best quarter in over 30 years. Should you be doubting the metal and is it wise to keep buying? See what this leading investor is saying here.

With the recent price fluctuations that gold has seen, many have been wondering what's next in store for the wise investor: can gold sustain its rally, or is its current strength a come-and-go hot money affair?

Speaking to CNBC in a recent interview, known gold guru George Milling-Stanley said he's leaning heavily towards the former. Milling-Stanley is a true gold buff, having stuck to the metal for 40 years in spite of naysayers – his faith paid off, as he now manages the $33 billion S&P depository receipts (SPDR) Gold Trust fund that's up 15% year-to-date.

His experience with the yellow metal also lets him refute these naysayers easily, especially since they tend to focus on gold's perceived lack of return. "For 40-something years, since I first got into gold investing in the 1970s, people have been saying it doesn't pay a return. Well, guess what? Not much else does these days, either. People are charging you to store money. [gold] GLD costs less at 40 basis points annually than holding Swiss francs," Milling-Stanley explains.

While recognizing the risks that hot money poses, he doesn't see it as responsible for gold's early-year success: "We think most people were dangerously underweight gold or out of the market altogether," he said. Instead of huge gains ahead, Milling-Stanley would prefer to see a moderate steady increase, predicting such thanks to demand "across the board" – including that from emerging markets – and stagnant mine production. "I would like to see gold go up steadily by about $100 in 2016, so to the $1,350 to $1,375 level by Christmas. That would be sustainable."

Milling-Stanley also mentions his four talked-about factors that have been keeping gold down in recent years. Each of them is now swinging towards the metal's favor: the dollar trade won't be as monolithic as before, the Fed is struggling to reach inflationary goals, equities are no longer posing a significant threat and investor sentiment is shifting. Milling-Stanley explains why the last point is particularly important: "A big factor is the change in the perception of risk, which has done a 180, even if the risks haven't changed. People are looking for risk-off assets. Risk-off trading was enough to give us a $200 rise. The perception of a riskier environment is liable to be what's governing here."

As for investing, the gold expert doesn't think anyone missed the boat: those who wanted to sell gold already did so at its $1,800 level, so there shouldn't be a surge in selling back or recycling until the metal goes a lot higher. And Milling-Stanley believes it can: "This thing could run. I won't say it's going to, but it could. It showed us in 2011 it could go up dramatically," he added.

Is gold the asset you can't hack, erase or delete? Read about this here.