Gold Battles $1900 As Inflation Problems Compound

So much has been said about all of the money printing, gazillions of articles have been written about rising prices, and we’ve all heard shout after shout from the rooftops about supply chain disruptions and shortages, but there is another inflation-inducing problem that is perhaps even worse than all of those problems combined because this other problem is not something that is measurable in an easily quantifiable way. Of course, I’m talking about the US Federal government’s constant tinkering with the markets and the economy, and the intended or unintended consequences of all that tinkering.

Please allow me to explain using one simple example: Microchips.

A microchip shortage has caused a whole lot of problems for manufacturers and producers around the world, and there is no doubt the shortage has wreaked havoc in the United States. In fact, the problems have been building for years, and the problems pre-date the pandemic as evidenced, in part, by then-President Trump’s 2019 "Executive Order on Securing the Information and Communications Technology and Services Supply Chain”, in which President Trump even declared a National Emergency. The national emergency declaration was continued by President Biden just this very month, through May of 2022.

That national emergency declaration and the continuation of it are just one example of tinkering, however. There are other examples. In February of 2021, there was President Biden’s "Executive Order on America’s Supply Chains". Additionally, just this month, on May 12, President Biden signed the "Executive Order on Improving the Nation’s Cybersecurity". In other words, to say the US Federal government is tinkering with the US microchip industry is a major understatement.

Of course, anybody who goes to a store, and especially anybody who has been shopping for a car, or for an appliance, or for a computer, or for something else that uses microchips, which is pretty much everything nowadays, has been feeling the price inflation induced by the government’s tinkering immensely, and while the government portends to be “doing something” about it, for lack of a better term, the inflation caused by the government is about to take a turn for the worse. Between the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, or the CHIPS for America Act, or the CHIPS Act for short, which was passed as part of last year’s National Defense Authorization Act, to the brand new United States Innovation and Competition Act of 2021, which is moving through Congress right now, the US Federal government is increasing its role and influence in the semiconductor industry in a huge way.

And because all of this has real-world consequences, let’s follow a series of events that have happened over the last week to demonstrate the government’s increasing role and influence, the tinkering, if I may, and, more importantly, why the increasing role and influence means the shortages, supply chain disruptions, and the price inflation will surely get worse before they get better.

As stated earlier, the CHIPS Act was passed as an amendment to the NDAA, but all of the stuff the US Federal government plans on doing under the legislation is not yet funded, and the funding is what members of Congress are currently bickering about right now. Indeed, last Wednesday, May 19, 2021, US Senator Cornyn of Texas, one of the original sponsors of the CHIPS Act, said on the Senate floor with regards to the microchip shortage and the provision in the NDAA pertaining to employee wages (bold added for emphasis and commentary):

...unfortunately, politics being what it is, and Washington being a political city, there are unnecessary and purely political provisions related to the payment of prevailing wage, which US semiconductors already pay their employees, and they’ve created a problem for funding this non-controversial measure to bring chip manufacturing back to American soil...there is a clear and urgent need to bolster domestic semiconductor manufacturing and to secure one of our most, if not the most, critical supply chain...

In other words, the US is about to give tens of billions of dollars to US microchip manufacturers, but some politicians do not want strings attached to that free money, strings such as wage provisions for employees and workers.

Now, the very same day Senator Cornyn was speaking on the Senate floor, May 19, 2021, Advanced Micro Devices, AMD, arguably one of the most important microchip manufacturers in the world, headquartered in the United States, announced a $4 billion share buyback program as a way to return money to AMD shareholders.

From AMD (bold added for emphasis and commentary):

"AMD (NASDAQ: AMD) today announced that its Board of Directors approved a new share repurchase program. Under this program, the company intends to repurchase up to $4 billion of outstanding AMD common stock. AMD expects to fund repurchases through cash generated from operations which have been strengthened by the company’s strong operational results.

Today’s announcement reflects our confidence in AMD’s business and the successful execution of our multi-year growth strategy,” said Dr. Lisa Su, AMD president, and CEO ” Our strong financial results and growing cash generation enable us to invest in the business and begin returning capital to our shareholders.

So, AMD is saying that it is going to spend billions of dollars to buy back its own stock in order to return value to shareholders. This means AMD will be purchasing billions of dollars worth of its own stock to decrease the number of AMD shares in the market, and as such, the price for the remaining shares goes up, as happens to prices when there is reduced supply among constant or increasing demand.

Perhaps you see where this is going?

The government is shouting from the rooftops about microchip shortages, national security, and the need to spend in the tens of billions of dollars, hundreds of billions of dollars eventually, really, to increase US domestic microchip production, and yet, AMD is basically saying that instead of investing in, oh, say, research & development, or plant & equipment, or something that would contribute to the actual production of microchips, AMD is simply going to buy back its own stock in order to boost its share price for the people who already own AMD shares.

The very next day, May 20, 2021, Senator Cornyn was again talking about microchips and supply chains on the Senate floor, saying, among other things (bold added for emphasis and commentary):

...It can take years to receive all of the high-functioning equipment necessary to build advanced microchips. Building a foundry is a huge undertaking that requires massive investment...there’s a clear need to bolster our domestic semiconductor manufacturing...now we have the job of fully funding these programs so they can actually get to work turning over dirt and getting these foundries off the ground...This is a matter of both our economic and national security...

Said differently, exactly one day after AMD announces a share buyback program in the billions of dollars, Senator Cornyn is once again saying the US government needs to spend a ton of money to boost microchip production in the United States, and that doing so is a matter of economic and national security.

But wait, there’s more!

That’s right folks, because on Sunday, May 23, 2021, in a nearly fourteen-minute interview, when being asked if the microchip shortages and supply chain disruptions are holding back the US economic recovery, US Department of Commerce Secretary Gina Raimondo said this to Yahoo Finance (bold added for emphasis and commentary):

...if you just take the auto industry, which is obviously a very, very important industry with a lot of jobs, but just in that one industry, we have thousands of folks furloughed right now, uh, and that’s true in other industries as well...look at the price of used cars, used car prices are through the roof. Why? 'Cause, there’s a shortage of new cars. Why? Because they can’t get their hands on enough semi-conductors. So, the ripple effects, throughout our economy, of semi-conductor shortages, are extensive...”

So, the US Secretary of Commerce is basically saying the shortages are so bad, that right now, thousands and thousands of employees have been laid because of the shortages, and it’s not just that there are ripple effects, but the ripple effects throughout the economy are “extensive”. And yet, AMD is spending billions to buy back its own stock?

I have a college degree in Information Systems and Security, as well as several tech certifications, and I say that because I think those credentials make me qualified to say, which I’ll ask as a question: If technology is one thing, it is ever-changing with intense competition that routinely weeds out and bankrupts weaker tech companies, yet AMD is so good, that it doesn’t even have to worry about staying on top of or beating out the competition, much less falling victim to it, or could it be that the US Federal government is just handing out billions and billions anyway, so for AMD, why not just engage in some highly profitable financial engineering instead of actual microchip engineering?

Oh yeah, and I forgot to mention that AMD just loves Senator Cornyn, in my opinion, so there’s that too, but my opinion is at least supported by the fact that AMD’s own political action committee has donated thousands and thousands of dollars to Cornyn.

Go figure.

There’s no conflict of interest there.

Is there?

To recap, let’s look at the two main events that have recently taken place, and let's think about why they are both highly price inflationary, in addition to why all of this government tinkering will not do anything to alleviate or mitigate the ongoing supply chain disruptions or the shortages:

  • The US Federal Government is printing up and handing out tens of billions of dollars (to start) to US microchip manufacturers, and this generosity from Uncle Sam may even include a provision for rising employees' wages.

  • AMD, arguably one of the most important microchip manufacturers on the entire planet, is spending billions and billions of dollars to buy back its own stock in order to boost its share price.

The government tinkering is easy to understand as the government doesn’t really produce anything, for the government can only borrow and spend, so inflation is the guaranteed outcome of the additional borrowing and spending. That is to say, whenever the government puts its heavy hand of influence on something, such as healthcare, or housing, or higher education, or whatever, prices skyrocket. Furthermore, if the wage provision of the CHIPS Act stands, wage growth is another form of inflation because the price paid for labor is indeed a price. Additionally, AMD is currently buying back its own company shares, and the resulting stock price increase is yet another form of inflation called “asset price inflation”. Meanwhile, as there is always a major lag between the implementation of any government program and results, be them real, fake, or otherwise, nothing is being done to directly alleviate or mitigate the microchip shortages and supply chain disruptions in the near-term, and arguably nothing is being done for the medium-term, so, therefore, contrary to what the Fed and the Federal government are claiming, the shortages, the disruptions, and the resulting inflation will not be “transitory”, but rather, ongoing.

And worsening.

In this analysis, I’ve written about just one single industry, the semiconductor industry, but in pretty much any and all industries, the US government is tinkering in similar ways. Take, for example, the lumber industry, and news is breaking from just yesterday that the Biden Administration is proposing increasing the tariffs on Canadian Lumber, right at a time when lumber is skyrocketing in price. Other industries, however, are the topic of a different article for some other day. Here’s the main point: There are plenty of measures of inflation that are quantifiable, as are the reasons for the inflation, such as the price of lumber and the direct effects on the price of a newly constructed house, but there is another factor which is contributing to inflation in a huge way, perhaps even more so than that which is quantifiable: Government tinkering.

The bottom line?

The inflation problem is not going away any time soon, and judging by recent events, the heavy hand of government is only making the problem worse.

Much worse.

And now, let’s go over some gold charts.

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Paul Eberhart
Paul Eberhart
Senior Market Analyst and Columnist

Paul Eberhart has been actively trading and writing about precious metals for more than a decade. A U.S. Army Iraq War Combat Veteran, he holds an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill...