Could hyperinflation be the scariest character this Halloween?

On this chilly Halloween weekend, we wonder whether we are pulling up to the Haunted House at the fairground, where hyperinflation looms like a shadowy figure ready to pounce. Twitter’s CEO certainly believes the time may be nigh. Meanwhile, over in the East, another form of “hyper” rockets fear into fraught global relations. But how will these myriad forces affect gold?

Let’s start with social media. Last week, the CEO of Twitter, Jack Dorsey tweeted on hyperinflation: 

Many a doom-monger has predicted hyperinflation since global central banks shifted to the most aggressive monetary policy in history. It hasn’t happened yet – even after over a decade of policies such as quantitative easing and asset-purchase schemes.   

Gold, itself, is certainly not trading as if hyperinflation were imminent, as Mr. Dorsey suggests: 

It is a great debate and one that is difficult to predict. If all central banks continue in the same manner, and all governments continue to spend more than they take in, then there is of course a chance that things could really get out of control. That is indeed why people hold gold. Not because it is likely to happen but, rather, as insurance. 

There have been two good responses to Mr. Dorsey’s tweet. One is from Cathy Wood of ARK, on this Twitter thread, who starts out by saying: 

“In 2008-09, when the Fed started quantitative easing, I thought that inflation would take off. I was wrong. Instead, velocity – the rate at which money turns over per year – declined, taking away its inflationary sting. Velocity still is falling.”

And additionally, a blog post by Cullen Roche suggests the Twitter CEO put his money where his mouth is and prepare his companies for the hyperinflation that he claims is imminent: Is Hyperinflation Coming? – Cullen Roche 

However, inflation is still moving higher.

If it persists, labour costs will rise further. Already, across the West, there are multiple reports of staff shortages, especially in retail industries. And while some commodities have eased off a little in the past days, the gains over the past year have been pretty staggering:  

Uranium URNM +241% 

Coal ARCH +163% 

Ags MOS +131% 

Oil XOP +160% 

Copper TECK +111% 

All Metals XME +81% 

S&P 500 Equal Weight: +43% 

Apple AAPL +30% 

Facebook FB +14% 

Amazon AMZN +6% 

Bonds TLT -9% 

via @BearTrapsReport 

Meanwhile, media reports of shortages continue: 

China Gas Stations Ration Diesel Adding to Supply Chain Squeeze 

U.S. coal stockpiles have plunged to the lowest in at least 24 years. 

Source: Bloomberg

Even the satirical news websites are finding the current inflationary period important enough to mock and joke about: 

Psaki Points Out That Inflation Doesn’t Matter Since There Are No Goods To Purchase Anyway 

Joking aside, any persistent inflation increases will soon start to worry markets, some of which are getting pretty interesting already. For example, Tesla’s value moved up to over to USD 1 Trillion on the news Hertz will buy 100,000 cars from them. Tesla is only the 5th company ever to do so and the first to do so with such skinny profits. 

Tesla surpasses $1 trillion valuation after Hertz order 

In the meantime, equity markets have recovered from their recent drop and are now making, or nearly making, all-time highs once again. The gain comes in spite of inflationary threats, rising Covid cases and a potential decrease in fiscal stimulus globally next year. The Evergrande property story has also subsided despite it being touted as the “Chinese Lehman Brothers” collapse. Yet, the story still has more to run. A number of bond payments are due in the next few months, which seriously put the company at risk of default. Such an event would test the implicit assumption of capital markets that the Chinese government will bail out the company and the parties that suffer from its woes. 

China, US ‘to up economic coordination’ as Evergrande crisis casts shadow 

Geopolitically, the tension between the US and China is heating up once again.

President Biden’s “slip” that the US would assist Taiwan in the event of a Chinese invasion was quickly corrected by the White House, though how much of a “mistake” it actually was has been debated.  

China says there is ‘no room to compromise’ on Taiwan in response to Biden’s vow to defend it from attack

US has few good options if China seizes islands close to Taiwan, war game concludes 

China-US tension: spat escalates after Blinken calls for UN support of Taiwan 

Additionally, on other “hyper” news, it was announced that a Chinese hypersonic weapon has been successfully developed. If confirmed, it would put the US at a major military disadvantage and could significantly alter the global balance of power. Certainly, an issue to keep an eye on. 

China’s hypersonic missile: Could it spark a new arms race? 

After Trump left office, many thought US-Sino relations would return to normal. However, there has been very little sign of that happening. Increasingly, there are more stories like this: 

US bans China Telecom over national security concerns 

And it doesn’t look like things will be getting any better. Perhaps the catalyst for gold upside is not necessarily inflation, but geopolitical trauma. Rhetoric on both sides is heating up and China feels that it is big enough to challenge the US. If Taiwan were to be invaded, then sanctions on China would almost certainly follow in addition to some sort of military response. The clash of the titans may be worse than hyperinflation. Before last week, such a response was perhaps only assumed. Now, given comments from Biden and his team, it is almost certain. 

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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.