What About Gold?
Of course inflation, or deflation for that matter, is not something easily controlled as the Fed has recently acknowledged.
“I don’t think there is any question that they won’t be able to stop [inflation] once it gets past 2%,” Gartman says. They will be surprised. The Fed, the ECB, the Bank of Japan will all miss their 2% target on the upside rather than the downside, that is what history tells us.”
In fact, Gartman believes it has already started. “How do you measure inflation and [do] the Fed and other monetary authorities [measure it]. You and I both know that the cost of medical expenses has gone up well past 2%, the cost of college has gone up well past 2%, the cost of gasoline and crude oil is well past 2% in the last two years. Eventually, with 4.5% unemployment, wages are [going] to go up. [Inflation] is already well beyond 2% depending on how one measures it. In another two to three years, they will be worrying that inflation is 3.5% to 4% and getting a little sport on the upside.”
What about Geopolitical Risk?
Oddly there has not been a great deal of talk about geopolitical risk, despite the issue with North Korea, a series of natural disasters and a volatile and unpredictable leader of the free world.
“Gold is tending to lose some of its geopolitical [importance]. Geopolitical risk is a factor but I wouldn’t call it a major factor,” Gartman says. “In years past a circumstance such as the North Korean situation would have sent gold $40 or $50 higher and it wouldn’t have corrected at all. Now it goes $10 or $15 higher and it corrects right away. The geopolitical impetus behind gold is relatively minor.”
Azous says that the factor has always been overstated. “It is important to acknowledge that outside of short-term price gyrations, the spot price of gold does not historically react to geopolitical unrest in a lasting way. That is why gold implied volatility on an absolute basis, and upside call option skew on a relative basis, is either extremely low, or largely inexpensive. Put another way, very few believe owning gold because of concerns over North Korea is worth it.”