The Gold Bugs Were Wrong

Operator Tyler here.

The Gold Bugs were way too early on their inflation call.

Ever since the start of QE, countless Austrian economic gold bugs have been warning about a tidal wave of inflation that will debase our hard earned savings. Their fear mongering is what sent gold up to nearly $2,000 an ounce.

Gold Futures

But the inflation never came. The gold bugs were wrong. And anyone who bought into their narrative has had to suffer through a 5-year bear market in gold.

What did the gold bugs overlook that made their prediction so far off the mark?

The labor market.

Economic stimulus can only create inflation if the labor market is tight.

When policy makers try to rev up the economic engine they do so by influencing demand. Tax cuts, QE, rate cuts and government spending are all trying to do the same thing — increase buying power. The more money people have, the more goods and services they can buy.

Now just because there’s more buying power doesn’t mean prices automatically go up. If the economy is recovering from a recession (like it has been since 2008), producers can keep up with this new demand by hiring on a ton of cheap workers. People are willing to work for cheap because they’ll take anything they can get. They just want to be employed. In econo-speak this is what we call a “loose” labor market.

As long as labor remains cheap, inflation stays subdued.

When the economy finally reaches capacity, producers can no longer hire for cheap. Everyone who wants a job already has one. In order for a company to poach an employee from another company they have to offer a ton of money. This is what’s called a “tight” labor market.

Tight labor markets create wage or cost push inflation. Since producers have to pay more for workers they hike their prices to offset the increased costs. These higher prices get passed down to the end buyer creating inflation.

For the last 4-5 years slack in the labor market has counteracted loose Fed policy.

Ever since 2013 all of the potential inflationary impacts of loose Fed policy have been absorbed by the loose labor market. That’s why inflation hasn’t shown up. Instead we got a goldilocks economic environment – modest growth and low inflation.

We’re still in this same modest growth, low inflation environment but with one key difference — the labor market has tightened significantly.

In a tight labor market, the amount of job openings are high, while the unemployment rate is low. This is exactly what we’re seeing now. Total nonfarm job openings are hitting a fresh high.

While unemployment is flirting with its lows.

Unemployment Rate

Companies want employees more than people want jobs. That means employers are going to have to fork over a ton of cash to fill their open slots. Wage hikes means higher prices are right around the corner.

Now’s the time to watch out for the inflation that the gold bugs have been looking for all along.

With a tight labor market, the economy has a much higher chance of overheating and sparking inflation. Serious inflation hasn’t happened for a long time in the U.S. so we have to go all the way back to the 1960’s to see a similar situation.

Back in the early 1960’s JFK took the reins of a sluggish U.S. economy and injected it with a fresh wave of stimulus. These policies worked and the unemployment rate began a nice downtrend — the economy improved.

In 1963 after Kennedy was assassinated LBJ took over. He inherited a true goldilocks economy similar to the one today. Unemployment was in the 4-5% range and inflation never got above 2%.

But instead of letting off the stimulus pedal he stepped on it even harder by pouring money into the Vietnam War effort.

Since the economy was already at full capacity with a tight labor market, all of this extra stimulus began to push prices up dramatically. The inflation rate skyrocketed and remained high for nearly 30 years.

The unemployment and inflation charts from the 1960’s look eerily similar to present day data.

Unemployment is right around that 4-5% level, exactly how it was when LBJ took office.

US Unemployment Rate

And the inflation chart looks similar too.

US Inflation Rate

If the 1960’s data is any useful guide, that means we have soaring inflation right around the corner…

What gives us even more confidence in this analog is that President Trump will have no reservations about keeping his foot firmly on the gas pedal.

Trump ran on job creation. He’s even alluded to the fact that if things do get overheated he’s still going pedal to the metal. He repeatedly talked about getting “tired of winning” while on the campaign trail. Actual quote below:

We’re going to win so much. You’re going to get tired of winning. you’re going to say, ‘Please Mr. President, I have a headache. Please, don’t win so much. This is getting terrible.’ And I’m going to say, ‘No, we have to make America great again.’ You’re gonna say, ‘Please.’ I said, ‘Nope, nope. We’re gonna keep winning.

With that attitude, the last thing he’s going to do is “tighten the fiscal belt”, nominate a bunch of Hawks into the Fed, and risk an economic slowdown.

He’s going to fill the FOMC with doves, cut taxes, and try to push through large government funded infrastructure projects.

All of these will tighten up any remaining slack in the labor market and send unemployment down into the 3s just like in the 60’s.

Trump won’t care about the potential impact of runaway inflation. By the time it really starts to become a problem, he’ll have ended his first term and it will be the next guy’s problem.

Investing in this type of economy requires special attention.

A lot of investors will be caught offsides once inflation starts to rear it’s ugly head. Almost all professional money managers today have little to no experience in managing assets through an inflationary environment. We don’t have much real life experience either. But what we do have is a solid framework for how to invest in inflationary environments.

This framework is called the Investment Clock.

The Four Phases of the Investment Clock

Using the investment clock framework we can see that we are exiting the Recovery phase. The economy has improved, unemployment is low, and life is pretty good for most Americans (or at least much better than what it was in 2009).

But now the macro tide has changed and we’re about to sail directly into the Overheating phase of the economic cycle.

Navigating this cycle isn’t difficult if you have the right tools and you know where to look. In fact, it can be one of the most profitable environments for global macro traders like ourselves.

In last month’s Macro Intelligent Report, sent to our premium subscribers, we laid out in detail where our investment dollars are going. Right now we think oil and gas stocks are primed to pop higher as commodities benefit from the impending inflationary tail wind.

And in next month’s MIR we’ll be discussing in more detail how rising inflation will affect fixed income and agricultural stocks. (Hint: Bonds are the last place you’ll want to be.)

The plan is to initiate some brand new positions at the start of October to take advantage of our view.

To learn more about how inflation affects markets, check out our Trading Handbook here.


  • The gold bugs were wrong in 2012.  
  • Economic stimulus only creates inflation if the labor market is tight.
  • Now that the labor market is tight, there is a high probability of rising inflation in the future.
  • Commodities tend to perform best in this environment.



Subscribe To Our Newsletter

Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.