Stagflation Is A Looming Problem That Will Drive Gold And Silver Much Higher

The last time there was stagflation in America it was very bullish for gold and silver. Very few are talking about stagflation, despite the signs that are cropping up. The bond vigilantes are on a buyers strike and driving up yields due to their concerns that the inflation war the Fed declared victory over in September is not over.

It sure sounded like the Fed is seeing stagflation issues cropping up in their December meeting. Powell said that their forecasts on inflation coming down to their 2% target have fallen apart.

It still shocks me that when he mentioned the estimates by members of the committee, he said they are predicting that economic growth will be well below inflation. Yet, nobody in the financial media has run with that prediction being a call for stagflation.

The jobs market tells us where the real economy is going and it isn’t good which is why I think the Fed members believe the economy will slow down to well below inflation. For over a year the economy has been shedding full-time jobs forcing workers to take on a couple, or more, part-time jobs.

In the way the BLS calculates unemployment, after they exclude people from the employable list when they have been unemployed for extensive periods of time, they consider that if someone loses a full-time job and then takes on two part-time jobs that the economy has created one job. This way of calculating of jobs does not accurately portray the actual strength in the jobs market.

Further signs of weakness is that to help make things sound better during the election year, the government hired a lot of workers to prop up the jobs numbers. If the jobs market was truly strong and at near real full employment, the full-time jobs wouldn’t be dropping and the government wouldn’t have needed to hire workers to try to win the election.

Now that Trump won, it seems like the honeymoon is on and that most believe he is going to switch a slowing economy into an accelerating one. But, some of his policies will throw a wrench into that outlook.

One of his most economically troublesome plans is to start trade wars with tariffs.

That will undoubtedly slow the economy and also drive inflation higher. He got elected in a landslide primarily because voters are struggling with the economy and inflation. It is kind of shocking that many people actually believe his pitch that tariffs won’t cause inflation because the foreign importers pay the cost. When the reality is that consumers want their products and will have the tariffs passed to them.

Trump also wants mass deportation, which his MAGA crowd loves but they haven’t really considered the ramifications, or don’t care. Many businesses need the low wage workers to make a profit, if those workers are deported, it will slow down the economy and also cause higher inflation when the businesses have to pay higher wages.

Trump also wants to cut taxes when the costs of medicare/medicaid, social security, interest on the debt and defense exceed the income from taxes.

The argument is that cutting taxes will spur economic growth, but the reality is that it hasn’t worked like that in the past. Maybe this time is different but when you look at the other economic issues such as tariffs and mass deportation, it likely won’t work this time. It will do what it has done in the past, which is to widen the gap between the rich and everybody else.

Elon Musk and Trump have everybody convinced that they will slash spending when that defies logic if you consider that Trump was a massive spender during his first term. He has the same spending issues as Biden and if you combine their two terms they made Obama look like a piker and he was the worst ever for a two-term president.

Elon Musk is correct when he says that government spending is bankrupting the country, but he has yet to come to terms with the reality that Trump was one of the worst ever. Trump supporters seem to be gleefully giving him a pass on his past spending addiction, and are in for a rude awakening when they find out he hasn’t changed.

To slash spending, they would have to start with medicare/medicaid, social security and defense. But, those are pretty much untouchable. The interest on the debt is a function of the level of debt and the interest rates. To make an impact on that, they would have to reduce the amount of debt and also the Fed would need to slash interest rates. Plus, they would have to eliminate all of the rest of government spending and would still have a deficit. The numbers just don’t add up.

Even if they were serious about slashing spending and if Trump’s spending disease is in remission, there is a big political problem to overcome. Politicians spend the way they do to pay off their financial supporters and to help them get rich in office through kickbacks. That won’t change because even though Trump won the presidency and the GOP controls the House and Senate, it is not by wide margins.

To slash spending they need complete GOP support for everything, and politicians in his own party know that and will push for their own interests. When the honeymoon is over and it comes time to govern, it won’t be easy to slash spending because politicians on both sides of the aisle love spending and creating debt.

A key driver for gold doing so well in 2024 was the growth in debt which is for the most part on cruise control regardless of who is in power. Which is why I call it a Death Spiral of Debt. The BRICS nations see the writing on the wall and have been loading up on gold. They have concerns about their US debt and US dollar holdings and are selling them to buy gold. They are absolutely correct to be questioning their US debt and US dollar holdings.

Trump talks about wanting a strong US dollar and for it to maintain its position as the world reserve currency. While he also laments the trade imbalance. If the US dollar is strong, then imports go up and exports decline. Squaring that circle won’t be easy and the US dollar will pay the price. He may sabre rattle about the US dollar, but he is likely more worried about the trade deficit than strength in the US dollar.

The Fed has another problem that is brewing. The bond vigilantes are on a buyers strike and are driving up the yields because they see that the debt instruments are in unprecedented supply. They are sending the message that they need higher yields when they lend the government money.

This brings up two issues, the debt market needs the buyer of last resort to get back in the QE business to bail out the debt market. And the economy needs lower rates.

Yields are going up due to not enough buyers and massive supply and the likelihood that a second wave of inflation is coming to shore. If the Fed doesn’t get back in the QE business, it will be a huge problem for the debt market, stock market and the economy.

Despite few people talking about it, stagflation is gaining momentum. The last time that happened, gold and silver went through the roof.

There has never been a better time to be bullish on gold and silver, especially in the stocks of best in breed miners, new mine developers with high-quality projects and explorers with important discoveries of gold and silver.

Investors in the West are ecstatic to buy overvalued stocks at extreme valuations that only come around prior to corrections. While speculators in the West are loading up on Bitcoin which is a Ponzi Scheme wrapped up in a mania. Does this sound like the situation prior to the Dotcom bust which was when the 2001 to 2011 gold bull market started?

It should because it is exactly the same, stocks on Wall Street had extreme valuations back then and there was a Dotcom mania. The only difference now is that Bitcoin has taken the place of the Dotcoms.

Everything is shaping up for gold, silver and the stocks in those metals to have a terrific year in 2025.

All the best,

Allan Barry Laboucan