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“I certainly thought that inflation was a dragon that was eating at our innards, or more than our innards, and if anybody was going to deal with this it was going to have to be the Federal Reserve. I saw the need to slay that dragon.”

That’s how Paul Volcker describes his tenure as the Fed chief in the 1980s. With inflation growing out of control, Volcker raised rates and deliberately put the nation into recession in the early 1980s to control runaway inflation.

Today we have the opposite situation: Our Fed chief is trying to unleash the dragon.

In fact, Pimco CEO El-Erian recently called the Fed’s current policy a “reverse Volcker” moment. Here’s what he said:

“Not only will they tolerate higher inflation, not only will they wish for higher inflation, but they actually may target higher inflation … We are so deep into unfamiliar territory, so deep into experimental mode, that we don’t know what the consequences will be. Whoever comes afterward will have to clean up the mess.”

So how do you make money in the “reverse Volcker” period? Well, you just have to buy the worst performing assets during the original Volcker years. Volcker was the Fed chief from August 1979 to August 1987. Here’s how precious metals and bonds performed during that period:

Bonds Rallied and Precious Metals Collapsed During Volker Years

See larger image

As you can see, Treasury yields fell 18%. That means bonds had a big rally. Gold fell 19%, while silver plunged 78%. During the Volcker years, it made sense to buy bonds and avoid precious metals.

Now that we have the “reverse Volcker” moment, you should buy precious metals and avoid bonds.


Evaldo Albuquerque
Senior Analyst

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