Is it possible for the U.S. dollar to be at serious risk of both excessive inflation and deflation? Yes, and we are facing that risk right now, according to Stanley Druckenmiller, billionaire CEO of the Duquesne Family Office and founder and former president and chairman of Duquesne Capital. The good news for us is that, according to history, either scenario would see gold and silver shine.
While the Federal Reserve seemed cool and confident about its recently announced framework that includes aiming for inflation between 2% and 5%, Druckenmiller shared in an interview on CNBC that he is anything but confident.
“The next three to five years are going to be very, very challenging … for the first time in a long, long time I’m actually worried about inflation,” Druckenmiller said. “I think the odds of us hitting the sweet spot – which I would say is around the 2% area, which is where we’ve been – has actually gone way down with the Fed activity.
“We actually have the chairman of the Federal Reserve, with a $3.5 trillion deficit, out lobbying Congress to do more spending, and guaranteeing those of us on Wall Street that he’ll underwrite it,” he continued. “I think it’s dangerous; I think we could easily see 5% to 10% inflation in the next four or five years.”
As we’ve discussed before, gold and silver both benefit from inflation. Historically, as the U.S. dollar has lost purchasing power, gold and silver have gained power. This is why many rely on gold and silver as a hedge against inflation.
But inflation isn’t Druckenmiller’s only worry. Noting Federal Reserve Chairman Jerome Powell’s creation of a “massive asset bubble,” Druckenmiller warned that deflation is also an imminent risk.
“Ironically, I also think he’s raised the risk of deflation,” said Druckenmiller. “The risk of inflation is much higher than I’d say it was 12 to 24 months ago and the risk of deflation – I’m talking -3% or -4% – [is also higher].”
The common question then follows: if inflation benefits gold and silver, wouldn’t deflation hurt them?
Citing historical precedents, Reuters answers this simply, saying, “Although it may seem counter-intuitive, gold can be as effective a hedge against deflation as against inflation.” The key is that the prices of both gold and silver are also affected by other factors including market sentiment and risk aversion. So, when an economy is suffering, as happens in periods of deflation, gold and silver once again find themselves in a climate for growth.