Stagflation to continue under Prime Minister Albanese

Stagflation to continue under Prime Minister Albanese

Dear Valued Customer,

In the past 1.5 weeks, the Australian people have changed the Federal Government in a landslide result, particularly a historic defeat for the Liberal National Coalition.

For the next 3 years, Australia will be governed by the Labor Albanese Government and will include support from the Greens and the crossbench in the Australian Senate (Labor, in the past 24 hours, has secured majority support in the House of Representatives).

From my perspective, the election of Anthony Albanese as Prime Minister changes very little to Australia’s national economic problems. In a recent episode of In the Interests of the People with Martin North titled Albanese will Defend the Property Bubble at all Costs, Martin and I outlined the philosophy and background of the core nucleus of the Government’s economic team, primarily who are:

• Anthony Albanese as Prime Minister;
• Jim Chalmers as Treasurer; and
• Katy Gallagher as Finance Minister.

You can watch the episode via the following link:

(22076) Albanese will defend the Property Bubble at all costs! - YouTube

All three individuals stem from the Labor tradition which seeks to minimise involuntary unemployment at all costs, which includes injecting economic stimulus through loose fiscal and monetary policy.

This tradition within the labour movement stems from the 1890s in the wake of the 1892/93 depression which brought the most mass economic misery to Australia since European settlement (particularly in Melbourne).

During this period of time, mass unemployment and financial destitution led to a sweeping social revolution which included the emergence of trade unions, calls for social reform and cultural iconic songs such as Waltzing Matilda.

Famously, the controversy between embracing deflation (i.e., popping the debt bubble and defending the value of the currency) and inflation took place in 1930/31 during the Great Depression, when the then Deputy Labor Prime Minister Joseph Lyons resigned from Cabinet and subsequently from the ALP in protest of the inflationary stimulus policies pushed by Federal Treasurer Ted Theodore and NSW Premier Jack Lang.

Lyons subsequently joined the conservative opposition and formed the United Australia Party in 1931 and went on to win the largest federal election victory in Australian history in December 1931 (the two party preferred vote was 58.5%) with an explicit deflationary fiscal austerity program.

Given the extreme nature of Australia’s current debt bubbles (especially household debt) and Labor’s historic tradition to support economic stimulus and avoid mass unemployment, the ongoing stagflationary pressure which I have documented since 2020 is likely to continue.

Outlook Fiscal and Monetary Policy

Both philosophy, ideology and the practical economic and political reality means that fiscal and monetary policy in Australia are likely to be extremely accommodative (or loose) in the coming years. No one within the current political, bureaucratic or financial establishment has the guts to face the consequences of a dramatic bust.

On fiscal policy, the Albanese Government is planning to announce a new budget later this year (probably September 2022), however, federal government spending and the budget deficit is expected to be higher than the outrageous and reckless spending levels of the Morrison Government. This new spending has already been labelled as ‘investments’ by the new Treasurer as this somehow justifies bankrupting the next 2 generations of Australians in order to paper over the problems of today.

With respect to monetary policy, we are seeing an aggressive approach by the Reserve Bank of Australia and other central banks around the world to contracting monetary policy through raising interest rates and quantitative tightening in an attempt to reduce aggregate demand and thus help drive official rates of inflation lower from the current high levels.

However, as I have recently mentioned in multiple interviews, there is a limit to how much central banks can tighten monetary policy before the financial system starts to become unstable and a catastrophic deflationary depression becomes a reality. Policy makers across the world are extremely conscious of the limits that monetary policy can play in the current environment.

Several central banks (such as the United States and New Zealand) have stated openly that they are aggressively raising rates in 2022, only to bring them back down again in 2023 coupled with a recommencement of quantitative easing.

At this stage, this policy reversal appears to be already priced in the US bond market, especially with longer term bond yields already reaching highs (such as the 10-year bond yield reaching a high of 3.15% on 6 May 2022) and are now coming back down.

Given these considerations, my base case forecast for the coming medium term is ongoing and intensifying stagflation.

What is happening with gold and silver prices?

There has been a lot of concern among precious metals investors as to what has happened with the price of gold and silver over the past 6 weeks ever since Easter.

In US dollar terms, the per-troy ounce price of gold has fallen from $US 1986 (on 18 April 2022) to an intraday low of $US 1786 (on 16 May 2022) or 10%, whereas per-troy ounce price of silver has been slammed from $US 26.15 (on 18 April 2022) to $US 20.50 (13 May 2022) or 21.6%.

In the Australian dollar terms, the move has not been so drastic given that the Australian dollar depreciated against the US dollar from $ AUD 1 = $US 0.75 on 3 April 2022 to $ AUD 1 = $US 0.69 cents on 12 May 2022.

The per-troy ounce price of gold in Australian dollar terms actually rose and peaked from Easter to $AUD 2,692.74 on 1 May 2022 as the US dollar surged and has subsequently fallen, whereas the per‑troy ounce price of silver fell from $AUD 34.65 on 13 April 2022 to $AUD 30.29 to 13 May 2022 or 12.5%.

These moves coincide with what market participants call the “fear trade”, which has included:

• a sharp sell-off in the US Share Market (especially technology orientated shares in the Nasdaq Index), cryptocurrencies, bonds and commodities; and
• bond yields surging; and
• a rush to the US dollar.

This fear trade resulted in the US dollar index (DXY) rising sharply and peaking intraday at 105.1 on 12 May 2022.

However, in the past 2 weeks, we have now seen a turnaround in:

• the US dollar index (falling);
• US bond yields (falling);
• the price of gold (in US dollar terms); and
• the price of silver (in both US and Australian dollar terms).

From a technical analysis perspective, falling bond yields result in real interest rates becoming more negative, thus leading to a weaker US dollar and a rise in gold and silver prices (priced in US dollars).

Beyond this, we have also seen in the past couple of weeks very bullish data from the COMEX (especially with silver in terms of warehouse inventories) and the Commitment of Traders report from the Commodity Futures Trading Commission.

Thus, especially in the context of silver (both in US and Australian dollars), it would appear that both US treasury bond yields and the US dollar have peaked for this cycle and thus that gold and silver prices are now ready to move much higher – even though both the gold and silver markets are manipulated (as discussed below).

The current market environment provides an opportunity to obtain precious metals at heavily discounted prices. This is an opportunity that I have personally taken advantage of using my own funds in the past 2 – 3 weeks.

How to end precious metals market manipulation?

AGAGA is the only Australian bullion dealership which openly and publicly acknowledges that gold and silver prices are manipulated and over the years Darryl and Brian have interview some of the leading precious analysts who speak openly about this topic – including the Chairman of the Gold Anti-Trust Action Committee (GATA) Bill Murphy.

For most other players in the Australian industry, discussion of systematic market manipulation is a grand conspiracy theory, even though evidence of precious metals price suppression is quite obvious.

Given that market manipulation is hurting in the financial interests of precious metals investors, I have given this topic a lot of thought and consideration since joining the industry in 2018. Obviously, last year I spoke publicly about the distortive role that fractional reserve unallocated and pool allocated schemes actually play in the physical markets of gold and silver.

Recently, I have penned a new column outlining my latest thoughts about what will it take to conquer market manipulation – especially in the realm of silver.

For those who have been frustrated (like me) that the per-troy ounce price of silver has not exceeded $US 30 for the past couple of years, hopefully, my latest column will provide you with some additional context.

Conquering Silver Market Manipulation - As Good As Gold Australia

Returning to the Speaking Circuit

Finally, as some of you may know, I spent a significant proportion of the current and previous financial years (from June 2021 to early April 2022) locked away working on a special project.

Now that this special project has been largely completed, I am now back full time working with AGAGA as their Chief Economist. In recent weeks, I have returned to being interviewed on numerous YouTube platforms speaking about the economy, the state of Australia and the world as well as precious metals.

Moreover, part of our plan in the coming months is to hold a number of seminars across Australia where I will be able to provide additional detail to my thinking about the Australian and global economies and why precious metals is such an important and fundament asset which should be part everyone’s portfolio – especially as economic conditions continue to worsen as we move forward.

AGAGA will be notifying everyone, in due course, about our upcoming seminars program.

All the best for now and if you have any questions, please don’t hesitate to reach out by emailing me via the following email address: [email protected].

Talk soon.

Cheers,

John Adams

Chief Economist

As Good As Gold Australia