Inflation accelerated its pace in March, which should support gold when economic confidence softens.

The U.S. CPI inflation rate rose 0.6% in March, following a 0.4% increase in February. It was the biggest monthly jump since August 2012. The move was larger than most analysts expected. However, I’m not surprised at all, as after February’s CPI report, I wrote that inflation “may rise further in the coming months”.

The acceleration in the inflation rate was driven mainly by a 9.1% spike in the gasoline prices over the past year (in March 2020, the price of oil plunged). But the core CPI monthly rate, that excludes energy and food prices, also accelerated to 0.3% in March, from 0.1% in February.

So, inflation has finally reared its ugly head, which is even more clearly seen on an annual basis. The overall CPI soared 2.6% over the last 12 months ending in March, following a 1.7% increase in the preceding month. Meanwhile, the core CPI jumped 1.6%, following a 1.3% rise in February. Hence, as the chart below shows, inflation has not only increased significantly since the bottom in May 2020, but it has also substantially surpassed the Fed’s target.

What’s important is that the recent jump in inflation is not a one-off event. We can expect that high inflation will stay with us for some time, or it can accelerate further next month, given the fact that oil prices plunged deeply in April 2020 (some oil futures even fell into negative territory!). So, the next CPI reading will have to factor in a quadrupling of oil prices over the year.

Implications for Gold

What does it all mean for the price of gold? Well, higher inflation should support gold, which is perceived as an inflation hedge. Furthermore, higher inflation should decrease or at least soften the rise in the real interest rates, further supporting the price of the yellow metal.

As the chart below shows, gold’s immediate response was positive, yet rather limited, with the price of the yellow metal increasing to almost $1,748 on Tuesday (Apr.13). After all, the increase in inflation was widely expected given the base effects and the latest Fed’s economic projections. So, no big surprises here.

However, I believe that inflation hasn’t said its last word yet. It could be just the beginning. You see, the current mainstream view is that inflation is no longer a problem in the contemporary economy, and that the 1970s-like stagflation will never happen again. Furthermore, the Fed believes that it would be able to contain inflation if it turns out to be really problematic. As Powell said in his recent interview,

The economy has changed. And what we saw in the last couple of cycles is that inflation never really moved up as unemployment went down. We had 3.5% unemployment, which is a 50-year low for much of the last two years before the pandemic. And inflation didn’t really react much. That means that we can afford to wait to see actual inflation appear before we raise interest rates.

The Fed Chair is right. The economy has changed. But the economic laws haven’t. So, the combination of the recent surge in the broad money supply, the supply disruptions, demographic shifts, base effects, and the realization of the pent-up demand, may still lead to inflation. And remember that the Fed’s new monetary regime is more tolerant to upward price pressure, which increases the odds of inflation getting out of control.

In other words, I believe that the risk of stagflation is underestimated. With increasing vaccination, unlocking the economy, and expectations of a vigorous recovery, economic confidence is high. So, investors should focus more on economic growth than on inflation. However, I bet that when this post-pandemic euphoria wanes, there will be a deterioration in economic confidence, caused either by more persistent and higher inflation than expected, or higher bond yields, or problems with the private and public debts. When this happens, gold should rally again.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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The latest FOMC minutes were dovish, especially in light of the recent increase in inflation. That’s good for gold.

Last week, The Federal Open Market Committee (FOMC) published minutes from its last meeting in March. They show that – in light of positive economic indicators – the members of the Committee turned out to be more optimistic about the U.S. economy since the previous meeting. But this is what we already know from the March economic projections.

What is new and much more important is that Fed officials expressed the view that despite all the progress, the economic situation remained unsatisfactory with many indicators still far from the pre-pandemic level and the Fed’s long-term targets:

Despite these positive indicators and an improved public health situation, participants agreed that the economy remained far from the Committee's longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook.

In consequence – and this is probably the key message from the recent minutes – the FOMC members reaffirmed that they are in no rush to taper the quantitative easing. Furthermore, the U.S. central bank will announce a change in the pace of asset purchases well in advance:

Participants noted that it would likely be some time until substantial further progress toward the Committee's maximum-employment and price-stability goals would be realized and that, consistent with the Committee's outcome-based guidance, asset purchases would continue at least at the current pace until then. A number of participants highlighted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases. The timing of such communications would depend on the evolution of the economy and the pace of progress toward the Committee's goals.

And the hike in the federal funds rate will happen only after the start of the normalization of the Fed’s balance sheet. So, given a lack of any communication in this regard, investors shouldn’t expect any increases in the interest rates for years.

Last but not least, the Fed not only started to expect higher inflation – as a reminder, the FOMC participants expect 2.4 percent PCE inflation in 2021 – but it also “viewed the risks of upside inflationary pressures as having increased since the previous forecast”. However, the central bankers still believe that the increase in inflation this year will be transitory due to the base effects and supply disruptions:

In the near term, the 12-month change in PCE prices was expected to move above 2 percent as the low inflation readings from the spring of last year drop out of the calculation. Most participants also pointed to supply constraints that could contribute to price increases for some goods in coming months as the economy continued to reopen. After the transitory effects of these factors fade, however, participants generally anticipated that annual inflation readings would edge down next year.

This is a puzzling view in light of the fact that many participants “judged that the release of pent-up demand could boost consumption growth further as social distancing waned.” So, in some magical way, the release of pent-up demand could boost consumption, but not prices, and inflation could be increased only by supply factor, but not by demand factors.

Implications for Gold

What do the recent FOMC minutes imply for the yellow metal? Well, the increase in expected and actual inflation rates combined with the Fed’s dovish stance could create downward pressure on the real interest rates and the U.S. dollar, thus supporting gold prices. The yellow metal could also benefit from the elevated demand for inflation hedges in an environment of stronger upward pressure on prices.

Indeed, the price of gold jumped shortly on Thursday (Apr. 8) above $1,750, as the chart below shows. This upward move was temporary, though, but that can change soon, as the inflation genie has popped out of the bottle.

The Producer Price Index increased by one percent in March, twice more than in February, and significantly above the expectations of a rise of 0.4 percent. As well, the final demand index moved up 4.2 percent for the twelve months ended in March, the largest increase since September 2011. Meanwhile, the index for all commodities surged even more (12 percent!), in the fastest pace since the Great Recession, as the chart below shows. Importantly, the Consumer Price Index has also been rising recently (I will cover this report in the next edition of the Fundamental Gold Report).

Of course, the rise in inflation may also increase the nominal bond yields, which could be negative for the gold market. However, the rally in the bond yields was mainly caused by the fact that investors priced in a more aggressive path of the federal funds rate than the FOMC members have indicated. But after the recent minutes it seems that these traders are starting to capitulate and will not fight the Fed anymore. This would be good news for the gold market.

Indeed, the second quarter started much better for the yellow metal than the awful beginning of the year, and there are some reasons (dovish Fed, higher inflation, limited potential for further rally in the bond yields) for cautious optimism. But the key problem is that the Fed is still relatively hawkish compared to the Bank of Japan or the European Central Bank. Well, we will see - stay tuned!

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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The March nonfarm payrolls were surprisingly strong. If the current favorable trend in the U.S. labor market continues, gold may struggle.

As the chart below shows, in March 2021, total nonfarm payrolls rose by 916,000, following gains of 468,000 in February (after an upward revision). The latest gains were the largest since August 2020. It’s important to note here that job growth was widespread, although led by gains in leisure, hospitality, education, and construction.

Furthermore, the U.S. economy added significantly more jobs than expected. Economists surveyed by MarketWatch forecasted 675,000 additions, but it turned out that employment in January and February combined was 156,000 higher than previously reported. Also on the positive side, the unemployment rate declined from 6.2 to 6 percent, as the chart below shows. As the unemployment rate is much below its high from April 2020, it’s clear that the U.S. labor market is recovering from the pandemic recession.

However, significant slack remains. First, the unemployment rate is still 2.5 percentage points higher compared to February 2020, before the pandemic started. Second, the broader unemployment rates, which paint a more accurate picture of unemployment, are even further from their pre-pandemic levels. For instance, the broadest U-6 rate was 10.7 percent in March, i.e., 3.7 percentage points above the level seen in early 2020. Third, the labor-participation rate is 1.8 percentage points lower than its pre-pandemic level, which means that many people simply dropped out from the labor market instead of searching for a job.

Implications for Gold

What does it all mean for the yellow metal? Well, gold’s reaction to a generally good employment situation report was positive. As the chart below shows, the London price of the shiny metal increased from $1,726 on April 1 to $1,745 on April 6, 2021, when the fixing resumed after the holidays.

The explanation for gold’s positive reaction might lie in the fact that although the employment report was positive, it won’t be enough to alter the Fed’s monetary policy. As a reminder, the U.S. central bank wants to see “substantial further progress” towards labor market repair before tapering the asset purchases and raising the interest rates. Of course, further such reports with almost one million job gains would force the Fed to admit that the situation improved substantially.

However, the Fed would like to see a continuation of the current trend for a while before it will alter its stance. Indeed, as Chicago Federal Reserve Bank President Charles Evans recently said, “those conditions will not be met for a while (…) Policy is likely on hold for some time.”

And it won’t be easy to sustain the current favorable trend in the labor market. This is because the large share of the unemployed are long-term unemployed, roughly 43 percent, and there is a risk that these people will get discouraged and drop out from the labor market. It’s easier to put short-term unemployed than long-term unemployed into work again.

Regardless, gold’s reaction amid the surprisingly strong nonfarm payrolls report and the accompanying rise in the bond yields could be seen as encouraging. Some analysts even believe that the yellow metal has bottomed out.

However, given that the U.S. outpaces its major peers in the pace of economic recovery, it might be too early to call the return of the gold bulls. So, the medium-term downside risks remain present in the gold market. Although the single report won’t cause an immediate shift in the Fed’s stance, if this trend continues, the market expectations of the Fed’s tapering and hikes in the federal funds rate could move up, exerting downward pressure on gold prices.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

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After starting to accept Bitcoin in payments, Tesla will also include gold as a possible means to purchase its electric vehicles.

It’s groundbreaking news that will make gold investors proud. Tesla, the electric vehicle maker, just announced that it will accept not only Bitcoin, but also gold in payments for its products. The official announcement says that the “the company will accept U.S. dollars, Venezuelan pesos, bitcoins, and gold in payments for Tesla cars, space rockets and other products”. The statement followed Elon Musk’s tweet saying, “Forget Dodge, gold is the ultimate money”.

The yellow metal skyrocketed after this latest news, reaching $2,345.67 per ounce (see the chart below), marking the biggest daily gain in the history of the gold market.

Figure 1 - The April First Data Centre

It shouldn’t be surprising, and other companies may now follow Tesla and begin to accept payments in gold, which, after all, served as money for thousands of years. If this happens, the demand for gold – which is currently not used as the means of payments – could soar.

It’s too early to say whether we are observing the beginning of the end of fiat currencies and the demise of the U.S. dollar, but it’s clear that we’re entering, well, a golden era for gold.

To those of you who’ve gotten this far into the article and may be excited, please note that this entire article is our April Fools’ Day joke – none of the above, including the chart – is true.

Thank you.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

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Biden just announced an ambitious and expensive infrastructure plan. Will it rebuild gold?

Yesterday (Mar. 31), President Joe Biden announced the big infrastructure plan, the second major legislative initiative after the $1.9 trillion coronavirus relief plan passed in early March. The proposal includes about $2.2 trillion in new spending over eight years, boosting government expenditures even further.

Despite the name, the plan assumes that only a part would be spent on infrastructure. To be more specific, Biden wants to spend $600 billion on transportation infrastructure (such as bridges, roads, airports, etc.), and more than $300 billion on improving utilities infrastructure (drinking-water pipes, electric grids, broadband). He also proposes to put more than $300 billion into building and upgrading housing and schools, $400 billion to care for elderly and disabled Americans, and almost $600 billion in research and development infrastructure, manufacturing, and job training.

That doesn’t sound bad at all (after all, infrastructure is critical), but there is a catch. The plan assumes that all the spending will be financed by tax hikes. Biden proposes to raise the U.S. corporate tax rate from the 21 percent set by Trump to 28 percent, as well as to eliminate all fossil fuel industry subsidies and loopholes. So, according to the proposal, the tax reforms will add about 0.5 percent of GDP in fiscal revenues, which are believed to fully pay for investments within the next 15 years.

Implications for Gold

What does Biden’s infrastructure plan mean for the U.S. economy? Well, I won’t argue that American infrastructure needs upgrading. There is a bipartisan agreement here. The problem is, however, that government spending programs are usually inefficient, and cost more than initially planned. Additionally, the plan seeks to give the government a significant role in new important areas, and to introduce anti-business and pro-labor unions regulations.

So, generally speaking, the proposal stems from Biden’s progressive belief that government can and should be a primary driver for economic growth, which is just plain wrong. As both economic theory and empirics show, the private sector is inherently more efficient than the bureaucrats (you can ask people in the former communist countries whether it’s true). Such a revolution in U.S. economic policy will weaken the allocative efficiency and hamper the long-term pace of economic growth.

Last but not least, the idea to raise taxes when the economy hasn’t fully recovered from the pandemic recession is controversial, at least. Higher taxes will weaken corporate America and redistribute resources from the private sector to the public sector, negatively affecting the economy in the long-run. As well, I don’t believe that the tax revenues will fully finance the plan, so the fiscal deficits will increase further, ballooning even more the already mammoth pile of federal debt (see the chart below).

And how will Biden’s infrastructure plan affect the gold market? Well, in the long-run, higher government spending, public debts, inflation, and corporate taxes should hamper the pace of economic growth and weaken corporate America and Wall Street. Hence, the proposal could be positive for gold prices, at least from the fundamental point of view.

However, Biden’s bold actions seem to be welcomed so far by the financial markets. This is because the fiscal stimulus – and the rollout of vaccination – is strengthening the risk appetite. There are also hopes that the “go big” approach will allow the American economy to recover more swiftly than previously expected and quicker than its European peers. These expectations could propel the bond yields further up (see the chart below), also strengthening the U.S. dollar, and creating additional downward pressure on the gold prices.

Therefore, although the Fed will have to step in and ease its monetary policy if the interest rates rise too much, the bond yields have room to move higher. This upward trend could continue to put gold under pressure, unless the yellow metal finds a way to diverge from its relationship with interest rates, for example, by attracting more investors worried about inflation.

If you enjoyed today’s free gold report, we invite you to check out our premium services. We provide much more detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports, and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. To enjoy our gold analyses in their full scope, we invite you to subscribe today. If you’re not ready to subscribe yet, and you are not on our gold mailing list yet, we urge you to sign up there as well for daily yellow metal updates. Sign up now!

Arkadiusz Sieron, PhD
Sunshine Profits: Analysis. Care. Profits.

-----

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our Gold & Silver Trading Alerts.

• Read more