Inflation rose in February, and it appears that more inflation is coming down the road. This development can, in fact, be good for gold.

The U.S. CPI inflation rate rose 0.4% in February, following a 0.3% increase in January. The jump was driven by a 6.4% spike in gasoline prices. The core CPI rose 0.1%, following no change in the preceding month.

So, inflation rose a bit in February, which is more clearly seen on an annual basis. The overall CPI increased 1.7 percent over the last 12 months, following a 1.4% increase in January. The core CPI rose 1.3%, following a 1.4% rise in the preceding month. Hence, as the chart below shows, although inflation remains below the Fed’s target, it has increased significantly since the bottom in May 2020.

And it may rise further in the coming months.

The first reason is purely statistical and relates to the low base effect. I’m referring here to the fact that oil prices have seen a deep plunge in March and April 2020 (remember negative WTI oil prices?), so we will see a surge here on an annual basis.

Second, manufacturers are struggling with significant price increases for raw materials and intermediate goods. Because of disruptions in supply chains and logistics (it’s not easy to obtain containers and get product through ports in these times), there is a rise in input and transportation costs. Entrepreneurs are also reporting shortages. In the Institute for Supply Management’s February manufacturing report, we can read following producers’ comments:

• “Supply chains are depleted; inventories up and down the supply chain are empty. Lead times increasing, prices increasing, [and] demand increasing.”
• “Prices are going up, and lead times are growing longer by the day. While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up.”
• “Things are now out of control. Everything is a mess, and we are seeing wide-scale shortages.”
• “Labor shortages at suppliers are affecting material deliveries and prices.”
• “We have seen our new-order log increase by 40 percent over the last two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule.”
• “Prices are rising so rapidly that many are wondering if [the situation] is sustainable. Shortages have the industry concerned for supply going forward, at least deep into the second quarter.”

It doesn’t look good. We have a full production inflation. Indeed, the price of only one commodity was reported to decline in February (dairy) – the rest of them moved up, and several of them are in short supply. And the ISM Prices Index registered 86%, following 82.1% in January. It means that raw materials prices increased for the ninth consecutive month to their highest reading since July 2008, or the midst of the Great Recession.

Third, the easy fiscal and monetary policies should help to increase inflation. In December, Republicans passed their fiscal stimulus, and just this week Congress has passed Biden’s $1.9 trillion Covid relief bill, the most extensive stimulus measures in American history. All this will add to the mammoth pile of public debt. In February, the U.S. government posted a fiscal deficit of $311 billion, a record high for the month. In just the first five months of the 2021 fiscal year, the budget deficit has already risen to a record $1.047 trillion. Whoa, that’s a lot of new debt that the Fed will have to monetize!

Implications for Gold

What does all this mean for gold prices? Well, higher inflation should help the yellow metal, which is considered to be an inflation hedge. Higher inflation would also keep the real interest rates at the very low, negative level, which should also support gold prices. It goes without saying that gold needs a catalyst for a new rally. As the chart below shows, although gold has rebounded slightly this week, it still remains in a bearish trend.

Having said that, investors should remember about two things. First, inflation doesn’t have to be helpful for gold prices, if it triggers expectations of a more hawkish Fed. In such a scenario, the rise in the bond yields may outweigh (at least initially) the positive factors. However, the Fed is going to tolerate higher inflation, so it’s likely that the federal funds rate will stay behind the inflation curve.

Second, higher inflation does not have to help gold right away. What I mean is that as long we have an economic recovery and decent economic growth, Mr. Market may simply focus on growth and shrug off higher inflation. However, I bet that the current period of economic recovery will be followed by a period of stagflation, i.e., a period of stagnation and inflation. In such an environment gold will shine. This will not happen tomorrow, but it will happen eventually.

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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Gold remains inert to President Biden’s large and hazardous economic plan, and ended up dropping below $1,700.

President Joe Biden’s $1.9 trillion COVID-19 stimulus is coming! On Saturday, the U.S. Senate passed the American Rescue Plan on a party-line 50-49 vote. This means that after the House’s vote on Tuesday, Biden could sign the bill into law soon, and those $1,400 payments to most Americans could start to go out as soon as this month.

The final bill includes not only $400 billion in checks of $1,400 to most Americans, but also $300 a week in extended unemployment benefits, and $350 billion in aid to state and local governments.

The American Rescue Plan would be one of the largest stimulus packages in U.S. history. It would also be one of the most frivolous and superfluous economic programs. There is simply no need for such a large plan. Please take a look at the chart below.

As one can see, U.S. personal income has increased during the pandemic, not decreased. Once again, people are now receiving higher income than one year ago. So, Biden’s stimulus with another round of $1,400 checks is not economically or socially justified.

Indeed, the U.S. economy is already recovering. On Friday (Mar. 5), we got surprisingly good data about the American labor market, that showed the economy added 379,000 jobs in February, much above expectations. Meanwhile, the unemployment rate has slightly decreased further, as one can see in the chart below. Employment is still down by 9.5 million, or 6.2 percent, from the pre-pandemic level seen one year ago, but additional unemployment benefits or plain checks will not help bring people back into employment – in fact, the effect may turn out to be the reverse.

Hence, Biden’s fiscal stimulus will bring little benefit to the economy, while significantly expanding the federal debt and risking overheating the economy. Indeed, the plan is estimated to increase the already high public debt (see the chart below) by an additional ten percentage points as a share of GDP.

Implications for Gold

What does this all mean for gold prices? From the fundamental point of view, Biden’s plan should be positive for the yellow metal. This is because it can increase inflation in the long-run, if people finally decide to spend all the money they got from Uncle Sam. It will not happen in the immediate future, as households will initially save the received payments, and some of them will repay their debts, but they are likely to spend more this year, to compensate for curbed consumption in 2020.

However, whether Biden’s plan turns out inflationary or not, it will expand the already mammoth public debt. It should weaken the position of the greenback and increase the odds for a debt crisis or paying out this debt through inflation or financial repression. The higher the debt, the more difficult it will be for the Fed to normalize interest rates (welcome to the debt trap, my friends). All these factors should support gold prices in the long run.

However, gold remains deaf to Biden’s disharmonious symphony. Indeed, as the chart below shows, the yellow metal has declined below the important level of $1,700 last week. It seems that the fiscal stimulus (together with the rollout of vaccinations and the economic recovery) has so far strengthened the risk appetite among investors who don’t focus on long-term consequences of the fiscal stimulus.

This may change one day, but the sentiment in the gold market is clearly negative right now, and the fundamentals are more positive. The fundamentals may come to the fore in the end. However, gold may struggle further, especially if real interest rates go up 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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Gold remains in a bearish trend as economic confidence has improved, however, inflation can change all that around.

The chart presenting gold prices in 2021 doesn’t look too encouraging. The yellow metal continued its bearish trend at the turn of February and March. So, as one can see, the price of gold has declined from $1,943 on January 4 to $1,711 on Wednesday (Mar. 3) This means a drop of 232 bucks, or 12 percent since the beginning of the year.

What is happening in the gold market? I would like to blame the jittering bond market and increasing bond yields, but the uncomfortable truth is that the yellow metal has slid in the past few days despite the downward correction in the bond yields. If you don’t believe, take a look at the chart below. This is an important bearish signal, given how closely gold is usually linked to the real interest rates.

So, it seems that there are more factors at work than just the bond yields. One of them is the recent modest strengthening of the greenback, probably amid rising U.S. interest rates and ECB officials’ remarks about possible expansion of the ECB’s accommodative stance if the selloff in the bond market continues.

Another piece of bearish news for the gold market is that President Joe Biden struck a last-minute stimulus deal with Democratic Senators that narrows the income eligibility for the next round of $1,400 stimulus checks. It means that the upcoming fiscal stimulus will be lower than previously expected, negatively affecting inflation expectations and, thus, the demand for gold as an inflation hedge.

Lastly, I have to mention the high level of confidence in the economy. Indeed, the recent rise in the bond yields may just be a sign of more optimism about the economic recovery from the pandemic recession. Hence, despite all the economic problems the U.S. will have to face – mainly the huge indebtedness or actually the debt-trap – investors have decided to not pay too much attention to the elephants in the room. As the chart below shows, the credit spread (ICE BofA US High Yield Index Option-Adjusted Spread), which is a useful measure of economic confidence, has returned to the pre-pandemic level, indicating a strong belief in the state of the economy. This is, of course, bad for safe-haven assets such as gold.

Implications for Gold

What does this all mean for gold prices? Well, from the long-term perspective, the recent slide to almost $1,700 could just be noise in the marketplace. But gold’s disappointing performance is really disturbing given the seemingly perfect environment for the precious metals. After all, we live in a world of negative interest rates, a weak U.S. dollar, rising fiscal deficits and public debt, soaring money supply and unprecedented dovish monetary and fiscal policies. So, the bearish trend may be more lasting, as market sentiment is still negative. Investors usually turn to gold, a great portfolio diversifier and a safe haven, when other investment are falling. But the worst is already behind us, the economy has already bottomed out, so confidence in the economy is now high, and equities are rising.

Having said that, the recent jump in the bond yields also means rising inflation expectations. Indeed, as the chart below shows, they have already surpassed the levels seen before the outbreak of the pandemic.

Actually, the 5-year breakeven inflation rate has reached 2.45 percent, the highest level since the midst of the Great Recession. So, in some part, investors are selling bonds, as they are preparing for an reflation environment marked by higher inflation. At some point, if the fear of inflation strengthens, then economic confidence will waver, and investors could again turn toward gold.

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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The economy seems to be recovering, while bond yields are increasing again, sending gold prices down.

Not good. Gold bulls can be truly upset. The yellow metal continued its bearish trend last week. As the chart below shows, the price of gold has declined from $1,807 on Monday (Feb. 22) to $1,743 on Friday (Feb. 26).

What happened? Well, last week was full of positive economic news. In particular, personal income surged by 10 percent in January, compared to only 0.6-percent rise in the previous month. Meanwhile, consumer spending increased 2.4 percent, following a 0.4-percent decline in December. This means that, on an absolute basis, personal consumption expenditures have almost returned to the pre-pandemic level, as the chart below shows.

Additionally, durable goods orders jumped by 3.4 percent in January versus a 1.2-percent increase one month earlier. Moreover, initial jobless claims declined from 841,000 to 730,000 in the week ending February 20, as the chart below shows. It means that the economic situation is improving, partially thanks to the December fiscal stimulus.

And, on Saturday (Feb. 27), the House of Representatives passed Biden’s $1.9 trillion stimulus package. Although the bill has yet to be approved by the Senate, the move by the House brings us one step closer to its implementation. Although the additional fiscal stimulus may overheat the economy and turn out to be positive for gold prices in the long-term, the strengthened prospects of higher government expenditures can revive the optimism in the financial markets, negatively affecting the safe-haven assets such as gold.

Finally, on Saturday, the FDA authorized Johnson & Johnson’s vaccine against COVID-19. This decision expands the availability of vaccines, which brings us closer to the end of the epidemic in the U.S. and offers hope for a faster economic recovery. The new vaccine is highly effective (it provides 85-percent protection against severe COVID-19 28 days after vaccination) and most importantly, requires only one dose, which facilitates efficient distribution. So, the approval of another vaccine is rather bad news for gold and could add to the metal’s problems in the near future.

However, the most important development from the last week was the jump in the bond yields. As the chart below shows, after a short stabilization in the first half of the week, the yields on the 10-year Treasuries indexed by inflation rose from -0.79 to -0.60 percent on Thursday (Feb. 25). This surge in the real interest rates is negative for the price of gold.

Implications for Gold

What does this all mean for the price of gold? Well, the increase in the bond yields is clearly bad for the yellow metal. Although they have partially risen to strengthened inflation expectations, the real interest rates have also soared. It means that investors expect wider fiscal deficits and expanding vaccination to accelerate inflation only partially, but in a large part, it will speed up real economic growth. This is a huge problem for gold, as real interest rates are a key driver of gold prices.

An additional issue is that the expectations of higher economic growth and inflation create accompanying expectations for the Fed to tighten its monetary policy and hike the federal funds rate, which exerts downward pressure on gold prices.
This is what we were afraid of at the beginning of the year. We noted that the real interest rates were so low that the next move could be up. Importantly, there is further room for upward trajectory, as the real interest rates are still importantly below the pre-pandemic level.

However, we wouldn’t bet on the return to the levels seen last year. After all, interest rates didn’t return to the pre-crisis level after the Great Recession, so it’s unlikely that they will do it now. Additionally, investors should remember that the U.S. government is now so heavily indebted that if Treasury yields continue to increase, the Fed would have to intervene. A failure to do so would mean that the interest expenses would grow too much, creating serious problems for the Treasury. So, the current bearish trend in gold may not last forever – although it may still take some time.

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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Powell testified before Congress and reiterated the Fed’s dovish stance, but nevertheless, gold continued to slide.

On Tuesday, Powell testified before the United States Senate Committee on Banking, Housing, and Urban Affairs. He offered no big surprises, so the markets were little changed. But the price of gold ended that day with a slight loss, as the chart below shows – perhaps just because Powell didn’t surprise, and struck a dovish tone.

Anyway, what did the Fed Chair say? In his prepared remarks, Powell acknowledged the improved outlook for later this year. As I noted in the last edition of the Fundamental Gold Report about the recent FOMC minutes, a more optimistic Fed about the U.S. economy is bad news for gold.

Additionally, Powell downplayed concerns about the recent rises in the bond yields (see the chart below), calling them “a statement of confidence” for an improving U.S. economic outlook, or “a robust and ultimately complete recovery”. This is also a negative comment for the yellow metal, as it would prefer the Fed reacting more aggressively to the increasing rates, and, for instance, implementing the yield curve control. The higher the yields, the worse it is for gold, which is a non-interest bearing asset.

However, Powell also made some dovish comments. First of all, he reiterated that the Fed’s easy stance will last very long – longer than it used to be in the past. This is because the Fed implemented last year a new monetary framework, according to which the U.S. monetary policy will be informed by the assessments of shortfalls of employment from its maximum level, rather than by deviations from its maximum level. Moreover, the Fed will seek to achieve inflation that averages two percent over time. These changes imply that the Fed will not tighten monetary policy solely in response to a strong labor market, but only to an increase in inflation. However,But inflation must not merely reach two percent – it should rise moderately above two percent for some time in order to prompt the U.S. central bank to taper the quantitative easing and hike the federal funds rate.

The second reason why the interest rates will stay lower for longer is that the economy is a long way from the Fed’s employment and inflation goals, and “it is likely to take some time for substantial further progress to be achieved”. On Wednesday, Powell acknowledged that it may take more than three years to reach these goals. This means that the Fed will treat any possible increases in inflation this year as temporary and will leave interest rates unchanged.

Implications for Gold

What does Powell’s testimony imply for the gold market? Well, gold bulls may be disappointed as the Fed Chair didn’t sound too dovish. He neither announced an expansion in the quantitative easing, nor the yield curve control, nor negative interest rates, nor a “whatever it takes” approach. And it seems that the yellow metal needs such things right now in order to survive – just like fish need water.

However, the rising bond yields could become a problem at one point for the Fed. If they continue to rise, Uncle Sam will not be happy, and the Fed will have to step into the market to buy government bonds. The central bank and Treasury are good old friends and the close relationship between Powell and Yellen may only strengthen this beautiful friendship – and support gold prices.

Moreover, the increasing bond yields (despite an ultra-dovish Fed) imply that reflation trade is strong. So far, investors just expect a return of inflation to a moderate level, but given the enormous surge in the broad money supply (see the chart below) and Biden’s mammoth fiscal plan, the risk of overheating is non-negligible.

It would be really strange if such an aggressive monetary expansion wouldn’t affect the prices. As one can see, the growth in the M2 money supply is 2.5 times faster than during the Great Recession. Actually, we are already seeing inflation – but in the asset markets, not the CPI. The stock and house prices are surging. The commodity sector has also already been gaining and gold may follow suit.

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