He points out that inflation remains extremely low and will remain there, given that while interest rates may remain low, massive U.S. unemployment and undercapacity means that the U.S. economy has a large output gap — ie. it is operating well below full potential.
Thus until unemployment falls drastically and capacity utilization tightens, low interest rates won’t trigger inflation since supply of labour and production capacity won’t be tight.
In fact, only the gold market is priced for massive future inflation, which unless all other markets are wrong, is a stark signal to short gold according to Mr. Nick.
Look at virtually any other market where you’d see signs that people were worried about inflation, and they don’t exist anywhere except the gold market. Look at TIPS, for example, which should tend to outperform by quite a bit when people are worried about inflation, as breakevens between them and Treasurys rise. But you aren’t really seeing that. Today you’re seeing a sharp contraction in breakevens. They’ve been pretty stable for the past three or four months, and they’re really only at average levels historically. So there’s no inflation premium in that market.
If you look at the U.S. Treasury market, the 10-year rate is now at 3.6 per cent, which is extraordinarily low. If there were really concerns about inflation on the horizon, we think the bond market would be reacting. But as it stands, it seems only gold is really pricing in a severe inflation scenario.
Frankly, if you were worried about inflation, there are cheaper ways to express that view, whether by buying TIPS or shorting a Treasury. It’s cheaper than entering the gold market right now.