Food Prices and Gold
The United Nations Food and Agricultural Organization (FAO), which tracks the cost of food items globally, recently noted that levels of food-price inflation are rising at their highest rates in over a decade. They are currently approaching levels not seen since the 2008 to 2011 time frame, when food riots were seen in 30 nations. Back then, the food inflation was partially explained by high oil prices, which are currently less than half of what they were back then. This implies that if oil were to reach the same price levels as 10 to 13 years ago, inflation for food prices, not to mention levels of social unrest, would be off the charts worldwide. We informed our readers of this scenario back in 2020 when the trends were just beginning, and recommended stocking up on shelf-stable food supplies, in addition to precious metals. If you were unable to prepare then, there is no time like the present
The Drought Connection
One of the factors playing a more prominent role in today’s food shortages is drought. As we highlighted back in January, supplies of clean water have become crucially low in many parts of the world, including in our own major agricultural regions. Nearly every food product grown, produced, or slaughtered requires massive amounts of fresh water, regardless of where in the world said item originates. Sometimes, the areas with the most fresh water (the U.S.’s Great Lakes, for example) do not have lengthy growing seasons for most crops. The nation’s largest reservoir (Lake Mead) has been declining in water levels since 1983, and currently holds only 35% of its capacity, threatening communities throughout the region with shortages of both water and hydroelectric power.
Less Food + More Dollars = Higher Prices
While the availabilities of both food and water have diminished, the quantity of currency floating around in the economy has increased. This has caused the value of food and water to rise, in dollar terms. Another way to say it is that the dollar has lost value compared to food and water. The FAO says that their data indicates food prices are up 40% since last year (see graphic). Meanwhile, people with savings in the bank have seen their purchasing power fall relative to the overall inflation rate. Anecdotally, I have clients saying their “savings account currently pays 0.03% interest,” while the official inflation rate is around 5%. In comparison, a composite of gold, silver, and platinum (the metals we have recommended for purchase this year) has grown at a 5.76% rate since writing the food inflation article in November. I don’t recommend owning metals as a means of becoming wealthy, but rather, as a way to preserve the purchasing power of the savings you already have.
Everyone Affected by Stagflation
Even the wealthy and corporate CEOs such as Alex Karp of Palantir recognize the utility of precious metals to preserve the purchasing power of their investments. Granted, the wealthy are usually not nearly as impacted by rising food prices as are the lower and middle classes, but the inflation we are currently experiencing is not limited to food prices alone. As the propensity for stagflation becomes more evident, the importance of owning precious metals becomes more clear for Americans of every wealth level. As the attached graphic illustrates, precious metals have been among the best performing assets during previous periods of stagflation. A more in-depth discussion of “stagflation” can be found here.
Most people are familiar with the “inflation” part of the stagflation story, as they can see the effects of rising prices whenever they shop. What has been less obvious is the “stagnation” part of stagflation. With all the increased stimulus money and unemployment benefits being issued, the economy hasn’t seemed very stagnant recently. But unless something happens quickly in Washington, those extra unemployment benefits, which officially expired on Labor Day, September 6, 2021, will quickly become relics of the past. While the headlines suggest there is a labor shortage, implying people will have no trouble finding work, the reality is that the types of jobs most available often do not offer sufficient pay to support a family. Someone making $25/hour would have to work six days a week all year long to earn the $62,746 that the average American family spends in a year. When spending is reduced, growth slows. Lower incomes plus slowing growth plus higher prices equals stagflation.
Unemployment Rate vs. Labor Participation Rate
The current numbers being discussed for the unemployment rate do not account for an additional 21 million working age adults that are not in the workforce for various reasons. A more accurate measure of the status of employment in the U.S. is the “labor participation rate,” which measures the percentage of working age adults working here in the United States. As the linked graphics indicate, the official unemployment rate has fallen from 15% during the height of the pandemic, to 5.2%. An unemployment rate of 5.2% would normally not be a bad number. But the labor participation rate is lower today than it was before the pandemic, with millions of non-working Americans no longer counted as “unemployed.” It is difficult to have a growing economy with so many people out of the workforce. Even when the opportunities for growth abound, those opportunities cannot be realized without the active participation of productive citizens.
At the same time that demand for goods produced overseas is increasing, the demand for dollars by producers located overseas is waning. So, combined with the already troublesome effects of domestic stagflation are the international effects of a devaluing dollar that Americans use to purchase goods manufactured abroad. It is possible, in my opinion, that part of the reason for the shortage of computer chips needed to manufacture automobiles, and the high cost in dollar terms to ship goods, has to do with companies and countries being less interested in receiving dollars as payment. Hence, it takes more dollars to secure the same amount of product. The answer to this dilemma, for companies and individuals nationwide, is to begin to store at least a portion of savings in the form of precious metals.
Precious Metals Diversification Strategy
While some say investing in stocks can help keep your savings safe from inflation, during times of stagflation, the calculus is different. Compared with the performance of stocks, silver has done nearly twice as well at protecting purchasing power during times of stagflation, while gold has performed more than three times as well. When we consider that September is historically the worst month for stocks, with precious metals currently trending higher, the prudent way to diversify your savings seems clear. This short video explains the hows and whys.