The Whiplash Effect

The last two years have seen some crazy moves in various markets. When the virus scare took center stage back in early 2020, prices of everything went down, as one would expect. With everybody locked down, the implications for the economy should be obvious.

But then everything changed. Prices of all things financial went up. It was as if the markets had decided that lockdowns were good for the economy. Gold topped out in 2020. But everything else continued up. The markets behaved as if we were in some kind of glorious industrial revolution.

Monthly gold chart

Prices of used carts, which had plummeted at the start of the scare went way up, followed by trucks and real-estate. However, these markets are now again under pressure. Gold, which has stalled for over a year, is again on the rise.

It all looks very odd if we focus solely on the price moves. However, once we factor in central bank meddling in the economy, we see what's going on.

With the virus scare and lock downs as their excuse, central banks went all in on their money printing schemes, and this money went into the hands of well connected billionaires. The super rich became a lot richer. Their access to cheep credit allowed them to buy assets from desperate middle class families who had seen their livelihoods destroyed by health experts. The sheer momentum of this move propelled financial markets to new all time highs. This signaled an all clear to others who started to buy capital goods like cars, trucks and real-estate.

The money printed in 2020 went first to billionaires who bought everything financial. It progressed from there into capital goods, and we are now entering a point where it's in the hands of ordinary people who use it to bid up prices on everyday goods and services. The price inflation in food and rent that we're seeing is the predictable consequence of central bank intervention in 2020.

The negative effect of price inflation is now starting to work its way through the economy. People have to sell real-estate and newly acquired capital goods like cars and truck in order to cover increased costs. The boom in transportation is coming to an end, with people forced to reduce their consumption due to soaring prices. A crash in financial markets looks imminent.

Central banks succeeded in postponing by two years the crash that was about to happen in 2020. However, they also made things much worse. Wealth inequalities are greater. Ordinary people who would have benefitted from a fall in prices back in 2020 are now broke. They will be unable to take advantage of the coming crash. They may even have invested in real-estate and capital goods right at the peak, thinking that things were bound to go even higher.

What we have seen over the past two years is an example of the whiplash effect I mention in my book on investing that I wrote back in 2018. I wrote the book mostly for my own sake, thinking I need a plan to deal with the storms I saw brewing on the horizon. Now that the storm has arrived, I'm glad I was prepared. I've stuck resolutely with gold and cash, and I've drained my cash reserves in favor of gold when faced with a need to use my savings. The result of this is that I've weathered the storm well so far, and I stand to gain in the likely event that gold will go a lot higher over the next few years.

Weathering the storm