When it comes to managing monetary policy right now, Federal Reserve Chairman Jerome Powell could be stuck somewhere between a rock and a hard place.
Recent sharp jumps in the Consumer Price Index (CPI) – including a 5.4% leap in June – have prompted some at the Fed to suggest interest rate increases could be in our near-term future.1 But Powell isn’t on board just yet. As troubling as the inflation signs are, the chairman remains more concerned about the nation’s jobless number. Even with all of the assistance the Fed has given the economy since the pandemic gained critical mass, unemployment has struggled to drop below 6% since the beginning of this year.
As a result, Powell remains committed to keeping interest rates where they are until he sees real progress in that area. Just last week, Powell emphasized that “we’re some way away from having had substantial further progress toward the maximum employment goal,” implying that interest rates aren’t going anywhere right now.2
A persistently uncertain unemployment picture is not the only obstacle to rate hikes. Servicing the nation’s vast and ever-growing debt load could prove challenging if rates start rising. Chartered Financial Analyst Dan Amoss says the problem is so bad that the Federal Reserve effectively has been “forced into a state of more or less permanent ease, almost regardless of the reported inflation rate.”
Amoss is by no means the only person who thinks the Fed is stuck when it comes to the matter of interest rates. Plenty of others feel the same way, including Diego Parrilla, manager of the 250-million-dollar Quadriga Igneo hedge fund. And it is this belief the long-term rate environment will remain highly accommodative that serves as the foundation of Parrilla’s forecast of a big move upward in gold.
In fact, Parrilla thinks the price of gold could rise to somewhere between 3,000 dollars and 5,000 dollars per ounce in the next three to five years. He originally made the projection last July amid the manic generation of COVID-based monetary stimulus – and recently reiterated the call on the basis that, in his view, gold’s underlying drivers have only grown stronger since.
When Parrilla originally predicted gold could rise as high as 5,000 dollars per ounce last year, he essentially said then what many are saying today: Central banks will be unable to manage inflation, because doing so requires interest rate hikes capable of devastating the financial system as it exists in its present condition.
Keeping interest rates low enough to functionally service debt is one issue. Another related issue about which Parrilla has consistently beaten the drum is the matter of keeping massively inflated asset bubbles aloft.
“What you’re going to see in the next decade is this desperate effort, which is already very obvious, where banks and government just print money and borrow, and bail everyone out, whatever it takes, just to prevent the entire system from collapsing,” Parrilla said last year, later adding that “the bubbles are too big to fail, and mommy and daddy will do whatever it takes to prevent this.”4
Fast-forward to today. Parrilla is even more concerned about the outlook for monetary policy against the backdrop of significant debt and substantially inflated asset bubbles. Convinced these influences will force the Fed to maintain an ongoing ultra-easy-money posture, he foresees much-higher gold prices in the years ahead.
In a recent Bloomberg article, Parrilla proposed any Fed tapering – a slowing of quantitative easing asset purchases – will be at a snail’s pace, and gold will continue to thrive. “The tapering process will be glacial in terms of speed,” Parilla said. “I think the drivers for gold strength not only remain but actually have been strengthened.”5 The hedge fund manager believes that few truly appreciate the extent of the damage that massively expansionary monetary and fiscal policies ultimately have wrought. It is Parrilla’s view that any attempt by the Fed to return to a more “normal” rate regime risks the collapse of the aforementioned asset bubbles.
“Central bank money printing isn’t really solving problems, it’s delaying the problem,” Parrilla said. “Gold will benefit purely from being a physical asset that you cannot print.”
Many readers undoubtedly will have their heads turned by Parrilla’s price targets. The prospect of gold ascending from its present level around 1,800 dollars per ounce to as high as 5,000 dollars per ounce in the next several years is alluring, to be sure.
I think Parrilla’s price projections are interesting, but what’s more important in my view is his outlook for the monetary and fiscal environment going forward. Even well-considered, very-measured predictions of future asset prices ultimately can miss the mark. But if the fundamentals that serve as the justification of those predictions are sound, that’s enough in my opinion to at least give serious consideration to including those assets among one’s holdings.
On that note, I find it difficult to disagree with Parrilla’s outlook that a multitude of factors likely will continue to hamper the Fed’s ability to actively fight inflation.
I think it’s worth noting, too, that Parrilla has been cogently expressing for many years his concerns about ultra-dovish policy as well as its potentially significant impact on gold. In an article he penned for Financial Times in August 2016, Parrilla declared then that “quantitative easing and negative interest rates have been game changers,” fueling in his opinion “one of the largest financial bubbles in history.”6
And just one month later, he effectively forecast the new record high for gold reached in 2020. In September 2016, Parrilla told Bloomberg that gold was at the outset of bull run lasting several years, one in which the metal would enjoy a “few thousand dollars of upside” courtesy of “monetary policy without limits.”7
Now Parrilla sees the bubbles as having grown only larger and the associated risks further intensified. I would suggest that intensification includes the single-minded pursuit by President Biden of a historic spending agenda for the next 10 years, the successful enaction of which is dependent on interest rates remaining at record lows according to the president’s own economists.8
Will we see 5,000-dollar gold in the next several years? Only time will tell. But what does seem reasonably certain is that the basic conditions Parrilla says could energize gold to such levels will prevail for the foreseeable future. For retirement savers wondering how best to navigate the years ahead, that could be enough.
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