The document discusses potential inflation scenarios and their implications for gold prices. It analyzes the likelihood of hyperinflation, deflation, stagflation, and a return to previous low inflation levels. The author argues that stagflation, with high inflation and slowing GDP growth, poses the greatest risk and would be most positive for gold. While the Fed expects current high inflation to be temporary, money supply and debt increases make low pre-pandemic inflation unlikely. Slowing growth projections for 2022 could produce the stagflation scenario gold performs well in.

1. Gold’s Behavior In Various
Parallel Inflation Universes

2. Point To Be Covered Today:
• Current High Inflation
• Inflation Rates Could Accelerate Further
• Gold Bugs Counting On Hyperinflation May Be Disappointed
• Deflation Is Also Unlikely
• Bad News For Gold
• High Inflation Will Be Temporary
• GDP Growth Projected Slow
• XAUUSD Chart

3. Current High Inflation
• The current high inflation could theoretically transform into hyperinflation,
disinflation, stagflation, or deflation. What does each mean for gold?
• Inflation, inflation, inflation. We all know that prices have surged recently.
• And we all know that high inflation is likely to stay with us for a while, even if
we assume that the CPI annual rate has already peaked, which is not so
obvious.
• But let’s look beyond the nearest horizon and think about what lies ahead
after months of high inflation, and what consequences it could have for
the gold market.

4. Inflation Rates Could Accelerate Further
• From the logical point of view, there are three options. Inflation rates could
accelerate further, leading to hyperinflation in an extreme case.
• They could remain more or less the same, resulting possibly in stagflation
when the pace of GDP growth decelerates.
• And, finally, the rates of annual changes in the CPI could slow down, implying
disinflation, or they could even become negative – in this scenario, we would
enter the world of deflation.
• So, which of these “flations” awaits us?

5. Gold Bugs Counting On Hyperinflation May Be
Disappointed
• It’s also worth remembering that hyperinflation usually occurs when fiscal
deficits are financed by money creation, especially when the government
cannot raise funds through borrowing or taxes, for example because of a war
or other sociopolitical convulsions.
• Sure, the budget deficits are partially monetized, but we are far from the
situation in which the US government would be unable to collect taxes or find
lenders ready to buy its bonds.
• Hence, gold bugs counting on hyperinflation may be disappointed – but I
doubt that they would really want to live during the collapse of the monetary
system.

6. Deflation Is Also Unlikely
• The opposite scenario, i.e., deflation, is also unlikely.
• To be clear, asset price deflation is possible if some of the asset bubbles
burst, but the absolute declines in the consumer prices, similar to those
observed during the Great Depression, or even the Great Recession, are not
very probable.
• The broad money supply is still increasing rapidly, the fiscal policy remains
easy as never, and the Fed remains ultra-dovish and ready to intervene to
prevent deflation.
• For deflation to happen, we would need to have the next global financial crisis
which would severely hit the aggregate demand and oil prices.

7. Bad News For Gold
• Although there are significant vulnerabilities in the financial sector, it’s
definitely too early to talk about significant deflation risks on the horizon.
• As with hyperinflation, this is bad news for gold, as the yellow metal
performs well during the deflationary crises (although at the beginning, people
usually collect cash, disposing of almost all assets).

8. The Latter Option Would Be Much Better For
Gold Than The Former One
• So, we are left with two options.
• Inflation will either diminish to its previous levels (maybe to slightly higher readings
than before the pandemic), and we will return more or less to the Goldilocks
economy, or inflation will stay relatively high (although it may subside a bit), while
the economic growth will slow down significantly (and more than inflation).
• It goes without saying that the latter option would be much better for gold than
the former one, as gold doesn’t like periods of decelerating inflation rates and of a
decent pace of economic growth (remember 1980 and the 1990s?).
• So, could gold investors reasonably ask whether we will experience disinflation or
stagflation?

9. High Inflation Will Be Temporary
• Well, the Fed believes that the current high inflation readings will
prove to be temporary and we will return to the pre- epidemic era of
low inflation.
• But you can’t step in the same river twice, and you can’t step in the
same economy twice. You can’t undo all the monetary and fiscal
stimulus nor the surge in the broad money supply and the public
debt (see the chart below).

10. US Money Supply & Total Public Debit

11. The Pre-pandemic Low Inflation Readings Are
Not Set In Stone
• So, the pre-pandemic low inflation readings are not set in stone. And the impact
of some deflationary forces could be exaggerated by the central bankers and the
pundits – for example, the recent ECB research shows that “the disinflationary role
of globalization has been economically small”.
• Hence, I worry about stagflation. And I’m not alone. The results of the latest
biannual survey of the chief U.S. economists from 27 financial institutions for the
U.S. Securities Industry and Financial Markets Association also highlight the risks of
high inflation and stagnation.
• They reveal that 87% of respondents consider “stagflation, as opposed to
hyperinflation or deflation, as the bigger risk to the economy.”

12. GDP Growth Projected Slow
• Actually, the GDP growth is commonly projected to slow
down significantly next year.
• For example, according to the recent Fed’s dot-plot, the
pace of the economic growth will decline from 7% in 2021 to
3.3% in 2022.
• It’s still fast, but less than half of this year’s growth. And it’s
likely to be slower, as the FOMC members tend to be overly
optimistic.

13. The Stagflation Scenario Could Be Positive For
Gold
• The stagflation scenario could be positive for gold, as the yellow metal likes the
combination of sluggish (or even negative) growth and high inflation.
• Indeed, gold shined in the 1970s, the era of The Great Stagflation. Of course, there are
important differences between then and now, but the economic laws are immutable: the
mix of easy fiscal policy and monetary policy superimposed on economic reopening is a
recipe for overheating and, ultimately, stagflation.
• However, so far, the markets have bet on transitory inflation. Moreover, they are focused
on fast economic expansion and the Fed’s hawkish signals.
• But we could see more uncertainty later this year when higher interest rates and inflation
hamper the economic activity. In that case, gold could get back on track.

14. Forex Today: Dollar Consolidates Gains Ahead Of
Fed
• The dollar retained its strength heading into the weekly close but was unable to
extend gains.
• Appetite for high-yielding assets dented demand for the greenback, while US
indexes closed at all-time highs. Government bond yields maintained the positive
tone, and settled near the upper end of their weekly range, also reflecting a
better market mood.
• Data released on Friday indicated that the economic recovery continued at an
uneven pace in July.
• Markit published the flash July PMIs. European indexes were mostly upbeat,
while in the US and the UK the services sector contracted.

15. US Federal Reserve Looms
• Majors remained range-bound at the end of the week, consolidating losses
against their American rival, as the US Federal Reserve looms.
• Choppy trading will likely prevail ahead of Wednesday when the central bank
will announce its decision on monetary policy.
• The focus is on tapering. The central bank will likely hint some action for the
last quarter of the year.
• Gold finished the week with modest losses just above the 1,800 mark. Crude
oil prices posted a nice comeback by the end of the week, with WTI settling at
$72.15 a barrel.

16. Technical Overview

17. Fundamental Overview

18. XAUUSD Chart

19. Major Currencies And Gold Performance Against Us
Dollar

20. Gold’s Behavior In Various
Parallel Inflation Universes

21. THANKS FOR LISTENING
Gold’s Behavior In Various Parallel Inflation Universes