Eggs and Oil, Gold and Silver

Do you remember earlier this year just a month or two after Donald Trump took office and the chorus from the Left that complained that Trump was doing nothing to bring down egg prices?

We are not hearing much about that subject any more.

Oil prices have also been dropping. 

Crude oil is 25% lower than when Trump took office in January.

This is starting to show up at the gas pump.

This was the per gallon price for regular at my local Costco yesterday.

Trump may get $2/gallon gasoline.

Right now crude oil prices per barrel are about where they were 20 years ago.

In inflation-adjusted terms, crude oil is priced as if we were back in the Reagan years in the 1980's.

You would normally believe that these price declines in key commodities portends better news on inflation going forward.

However, at the same time that the prices of eggs and oil have been dropping, gold and silver prices have been on a tear this year.

Gold is up 60% since the first of the year.

Silver has done even better.

It has risen almost 70% year to date.

Over the last couple of months I have been looking at the price of gold and silver every day and the upwards action has been uncanny.

Prices were up almost every single day like clockwork.

This is what you would expect to see if inflation was out of control and investors were looking to flee to the most durable store of value we have known over the centuries.

You would normally think that if eggs and oil were decreasing in price so would gold and silver.

At a minimum, gold and silver prices would not be going through the roof.

What is going on?

I wish I knew.

Underlying all of this has to be fears that inflation will reignite as it did in the Biden years,
concerns about the staggering amount of global and U.S. debt or uneasiness with the fiat money system.

It most likely involves all three.

I share the same worries when we have to trust our government and central bankers to protect the value of our currency.

That is especially true when I think about the research that Nobel Prize winner Daniel Kahneman did with Amos Tversky, Richard Thaler and Jack Knetsch in 1986 on how people judge fairness,

It is particularly relevant today.

It is also very troubling when you consider how easily the government authorities can use inflation to steal from the public without most believing it is the theft that it is.

The study tracked responses on whether respondents believed that certain outcomes were "fair" in economic terms.

The base case factual pattern was as follows.

A company is making a small profit.  It is located in a community experiencing a recession with substantial unemployment but no inflation.  There are many worker anxious to work for the company.  The company decides to decrease wages and salaries 7% this year.

62% of respondents judged this to be UNFAIR. 38% said it was ACCEPTABLE.

A second version of the question had a modification to the above with the identical facts with two small changes.

Instead of no inflation the facts were changed so that there was  "12% inflation" and the  company was said to decide "to increase wages only 5% this year".

Notice that in both cases the workers have lost 7% of their purchasing power in real money terms.

However, 78% said that the second version was ACCEPTABLE or FAIR and only 22% judged it UNFAIR.

The fact that they gained something in one pocket in the second version was all it took for them to ignore the fact that even more money was coming out of their other pocket. 

The study showed that most people are not able to consider the full second order effects beyond the immediate impact on their paycheck or bank account.

To put the issue another way, how do you think people would view these two scenarios involving Social Security?

One feels better. The other IS better.

Receiving a 2% social security increase when prices are rising 10% just doesn't feel as bad as having your social security payment cut by 5% when inflation is 2%.  

You are actually better off with the 5% cut from a buying power perspective. Most people just don't think or feel that that way.

I think of this study often as I see what is going on right now with inflation and where the United States may be heading in the future with almost $38 trillion in debt and a Federal Reserve that can print money at will.

Inflation is the easiest policy option for government to solve its debt problems.  It is also the easiest way to hoodwink the public. It just does not feel like you are losing if your wages are going up rather than going down no matter what else is happening.

It is akin to the frog that is put in the slowly heating pot of water.

What is the best explanation for why gold and silver are soaring in price?

I am not the only one who understands the easiest way for the United States and other governments around the world to get out of the mess they created.

More and more are hedging their bets by trading their paper money for hard assets that have proven to be a store of value for thousands of years.