The financial institution, Bank for International Settlements (BIS), which supports central banks around the world to achieve financial stability, has issued a dramatic warning this week which has given further fuel to the gold bulls. Its latest outlook paints a grim picture for the global economy, with BIS general manager, Agustín Carstens saying that the world is on the cusp of a new inflationary era. BIS believes inflation will be hard to flatten, meaning higher prices and inflationary pressures could be a long-term reality for nations around the world.
“After more than a decade of struggling to bring inflation up to target, central banks now face the opposite problem. We may be on the cusp of a new inflationary era. Central banks need to adjust to this new environment, not least by raising policy rates to more appropriate levels. The world economy must learn to rely less on expansionary monetary policies.
“Many of the forces behind high inflation remain in place, and new ones are emerging. There are already signs of increased price spill overs across sectors and between prices and wages, as is common in a high-inflation environment. The structural factors keeping inflation low in recent decades may wane as globalization retreats.”
The BIS outlook also called for a change to policy making, suggesting that inflation is the inevitable outcome of a fiscal stimulus approach. It outlines a focus on growing economic capacity as a more sustainable course of action with Carstens saying that it will now be challenging to tamper down inflation to normal levels.
“Boosting resilient long-term growth cannot rely on repeated macroeconomic stimulus, be it monetary or fiscal. It can only be achieved through structural policies that strengthen the productive capacity of the economy,” he said.
“Households, firms, financial markets and sovereigns have become too used to low interest rates and accommodative financial conditions. It will be a challenge to engineer a transition to more normal levels and, in the process, set realistic expectations of what monetary policy can deliver,” Carstens said. “We must strengthen the productive capacity of the economy. Higher potential growth would make it easier for indebted economies to withstand the higher nominal and real interest rates that are likely to prevail in the years ahead.”
The BIS outlook is highly supportive of the gold bulls, with the yellow metal thriving in a high inflation environment. The prospect of higher rates and persistent inflationary pressures also dulls investor appetite for risk and makes gold even more attractive.
Following publication of the BIS outlook, gold prices spiked higher, trading at a high of £1,488 ($1,941) yesterday (Thursday). With gold on course to gain even more momentum, don’t miss your chance.
