Summary

David describes here how the international ‘take off’ of high levels of inflation during the pandemic are likely to be sustained for many years to come. His central thesis is that inflation is a consequence of currency depreciation meaning the falling value of currencies against the ‘forward price’ of gold indicates a continued period of higher inflation.

First, during the early stages of the pandemic we saw the value of the Dollar create a mirror image against the value of consumer goods and PPI commodities, illustrating the relationship between currencies and inflation. This strong relationship helps to justify David’s deconstruction of some of the doctrines of inflation. We can see that inflation is not an imbalance of supply and demand or a delayed result of increased wages, nor is it caused by quantitative easing or extreme fiscal policy as many believe.

The link between inflation and currency depreciation also has historical evidence. David argues that one of the main factors in a currency’s depreciation is a lack of confidence in money itself. Inflation as a concept has been apparent since ancient times where Romans concluded it came from diminishing societal confidence in minted coins. Although today societal confidence does not concern itself with the intrinsic value of coins, the same logical process remains with a now fragile confidence in money due to the passive fall in value of fiat money.

As the pandemic moved into the last few weeks of 2020, we saw a surge in inflation after a previously stable period. Alternative inflation indices indicate different rises in inflation compared to the producer goods index due to its higher sensitivity. Slow moving indices, however, tend to catch up with the faster moving ones, meaning that the sharp rise in the producer goods index is not likely to have overestimated the overall rise.

We can predict relative inflation reliably using a foreign currency index; however, logically it cannot be used to predict absolute inflation. The price of gold cannot be used as it reacts to geopolitical events, as seen during the pandemic where gold prices rose when the Dollar fell. Future/forward markets, however, minimise such distortions as seen when the value of forward gold predicted the surge in inflation seen recently. Further evidence of this can be found when looking at data from 1987 where forward gold more accurately predicted the low inflation environment, when compared to spot gold and FDX. Since last year, internationally, currencies have fallen against the ‘forward price’ of gold indicating that these high levels of inflation seen recently show no sign of stopping.

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