Gold Focus as Supply Chains Poised for “Systems Collapse”

Have you noticed that store shelves aren’t as packed as they once were? I have. In fact, I’m noticing store shelves are downright bare in many places – much like those same shelves looked when people were “panic” buying at the outset of the pandemic.

However, it’s not panic buying that is stripping shelves bare this time. It is, instead, a significant weakness manifesting throughout global supply chains, which principally has been caused by draconian pandemic-cued restrictions on worker access and movement. Supply chains worldwide serve as the foundational systems by which products and services ultimately are delivered to consumers around the world, and it’s easy to see how supply chain interruption can be a potential issue for consumers and businesses alike.

However, with a more detailed analysis, we can see that the consequences of supply chain disruption go far beyond the inconvenience of not finding products that consumers need or want. So-called “supply shocks” can be responsible for product shortages so profound that they intensify upward pressure on prices.

The world’s central banks, including the United States Federal Reserve, would like us to believe recent price increases are temporary, and for that reason have wanted to delay any interest rate hikes until post-pandemic full employment is reached. However, broad price increases that central banks have been quick to write off as “transitory” could morph into sustained high inflation due in no small way to these persistent supply shocks.

“It’s frustrating to see the bottlenecks and supply chain problems not getting better, in fact at the margin apparently getting a little bit worse,” Federal Reserve Chairman Jerome Powell lamented recently.[1]

So just how bad is this insidious supply chain threat? Recently, four of the world’s leading groups of transport workers informed the United Nations that a systemic “collapse” is looming. And one of the world’s most prominent economists says supply chain weakness in China is right now propelling the U.S. into stagflation – that dreaded broad-based economic condition characterized by high inflation sans economic growth.

For retirement investors who are old enough to remember the 1970s, supply-shock-cued stagflation was a big reason why that decade was so economically turbulent. But some of those same retirement investors might also recall the epic performance of both gold and silver during this period. Against that historic decade-long backdrop of high inflation and low economic output, gold and silver soared 1,500% and 2,100% respectively from January 1970 to January 1980.

Will precious metals perform the same way again if current economic uncertainty morphs into 70s-style stagflation? I admit that I don’t know, and no one can say for sure of course. I suggest that retirement savers everywhere will want to carefully consider the nature of the looming inflation and stagflation threat. And as they do so, they also might want to take a metals focus and consider the capacity that physical gold and silver may have in helping protect their hard-earned savings.

Transport Workers Worldwide Sound Alarm on Supply Chain Fragility

In a stunning gesture recently, four major organizations representing a variety of transport industries sent an open letter to the United Nations General Assembly warning of potentially dire consequences to worldwide supply chain stability.[2] These well-established and respected groups are asking that transport workers receive priority in the global vaccination effort and be allowed to freely move about in the capacity of their jobs – without being subject to travel restrictions.

“We ask heads of government to urgently take the leadership that is required to bring an end to the fragmented travel rules and restrictions that have severely impacted the global supply chain and put at risk the health and wellbeing of our international transport workforce,” the letter expounds. “We also need the same urgent leadership to increase global vaccine supply by all means at our disposal, in order to expedite the recovery of our industries.”

At one point, the letter implores the powers-that-be “to identify solutions before global transport systems collapse.”

The four organizations behind the letter are the IRU (International Road Transport Union), the IATA (International Air Transport Association), the ICS (International Chamber of Shipping) and the ITF (International Transport Workers’ Federation). The groups collectively represent 65 million transport workers around the world who are responsible for the movement of more than $20 trillion in world trade every year.

“We are witnessing unprecedented disruptions and global delays and shortages on essential goods including electronics, food, fuel and medical supplies,” the letter declares. “Consumer demand is rising and the delays look set to worsen ahead of Christmas and continue into 2022.”

I try to take all opinions and reports in the news with a grain of salt to ensure that I’m analyzing the situation correctly, but this letter, to me, seems a solid representation of a dangerous road that our nation is traveling, so I’ll be keeping my eye on this situation, and I’ll let our readers know if there are any important developments related to the supply chains and prices.

Economist: “One Supply Chain Glitch Away From Stagflation” Now Playing Out

For his part, economist Stephen Roach, the former chairman of Morgan Stanley Asia, told CNBC recently that acute supply chain weakness is increasing the likelihood we’ll see the sort of crippling stagflation that famously characterized the 1970s.[3]

Roach is particularly concerned with the stability of the supply chain in China, the world’s largest exporter since 2009. China’s supply chain already has been under pressure for some time, due in no small way to the ultra-strict containment measures the country has adopted in the fight against COVID. Virus outbreaks have prompted the Chinese government to flatly lock down affected areas in that nation without regard to any potential economic fallout.

China’s approach to controlling health outbreaks has been a supply-chain stressor for some time. Now there is concern energy prices could exacerbate supply chain issues. Roach is worried that now-soaring energy prices and rationing is the “one supply chain glitch away from stagflation” that comes to pass and formally cues the dreaded economic condition.

“That seems to be playing out, unfortunately,” he noted.

“The likelihood of continued [supply chain] bottlenecks moving from one area to another, which is strikingly reminiscent of what we saw in the early 1970s, suggests that inflation will stay at these elevated levels for longer than we thought,” Roach said. “The Federal Reserve is already beginning to backpedal on its recent view that these pressures will fade quickly.”

Wharton’s Jeremy Siegel: “You Need Real Assets in an Inflationary Environment”

Indeed, mounting inflation pressures – including significant weakness in the global supply chain – are convincing some of economics’ most respected observers that rising prices will be anything but “transitory.” They instead see them as being potentially both chronic and debilitating.

Jeremy Siegel, the highly esteemed finance professor at the prestigious Wharton School, is another in a growing line of experts who believes inflation is going to prove to be a significant challenge through the foreseeable future. In a recent interview with CNBC, Siegel said ominously, “We’re headed for some trouble ahead. Inflation, in general, is going to be a much bigger problem than the Fed believes.”[4]

And where does Professor Siegel think investors should be in a truly inflationary environment? He discussed a few options during his CNBC interview. Among them: gold.

“You need real assets in an inflationary environment,” Siegel said. He thinks the mania over bitcoin and other digital assets has prompted some investors to forget about gold, which, in his assessment, has led to the yellow metal to “look relatively cheap…as an inflation hedge.”

Unemployment and Debt Challenges Could Ensure Negative Real Rates Amid Inflation

The prospect of the Fed ultimately deciding to raise rates against the backdrop of a worrisome inflation environment may prompt some to question the utility of gold. Rising rates, after all, also will help interest-bearing assets that some investors might favor over gold. But in my view, rising rates in an inflationary climate will be problematic for gold only if they’re hiked to a point where real rates – nominal interest rate minus inflation rate – turn positive. I see that as highly unlikely.

Note that the stagflationary 70s saw gold rise significantly even as interest rates moved upward. This is partly due to the fact that despite rate increases, inflation still remained higher than nominal rates for much of the decade. Look at it this way: Nominal interest rates could be as high as 5% (for example), but if inflation is running at 6% then real rates still are negative.

During his CNBC interview, Professor Siegel referenced the prospect of this scenario occurring today. “Even if the Fed raises one or two percent, that’s not going to do much good if inflation’s running five and six percent,” Siegel said.

He may be right about the Fed’s inability to raise rates by very much. For one thing, the U.S. central bank remains concerned about unemployment. For another, debt loads of all kinds – government, corporate and household – are at unprecedented levels, which means even slight interest rate increases could create debt-servicing havoc. All things considered, it does seem unlikely that the Fed has the ability to raise rates to a degree that they might effectively chase down inflation.

As you can see, U.S. retirement investors have no shortage of considerations when it comes to navigating the many roads to a secure retirement. And once again, another valued member of the economics community (Professor Siegel) has voiced his regard for metals and is suggesting a silver and gold focus for investors in the context of the highly uncertain economic environment that seems to be looming ever larger.

[1] Howard Schneider, Reuters.com, “Powell: ‘Tension’ between jobs, inflation is the chief challenge facing Fed” (September 29, 2021, accessed 10/7/21).

[2] International Chamber of Shipping, “Joint open letter – Transport heads call on world leaders to secure global supply chains” (September 29, 2021, accessed 10/7/21).

[3] Stephanie Landsman, CNBC.com, “Supply chain woes from Covid and energy may spark ’70s-style inflation, economist Stephen Roach warns” (September 30, 2021, accessed 10/7/21).

[4] Stephanie Landsman, CNBC.com, “Market is unprepared for the inflation fallout, Wharton’s Jeremy Siegel warns” (October 3, 2021, accessed 10/7/21).