Opportunity for Gold as Fed Battles Inflation
Things look like they can only get worse for Fed chair Jerome Powell. Just when the inflationary fallout from the Covid pandemic might be coming to an end, or at least winding itself down in peoples’ collective consciousness, the economy has been hit by inflationary trends totally outside the Fed’s areas of control.
First, there was the initial impact of the Russian invasion of Ukraine and its immediate direct effects on the food and fertilizer supply chain. Then came the added disruptions caused by the imposition of economic sanctions, supposedly designed to cripple the Russian economy, and now the draconian lockdowns resulting from China’s zero-Covid policy in at least a few key manufacturing and population centers are adding another element to the supply disruption equation. Add to this the fact that Covid cases seem to be climbing again in the USA and parts of Europe and Asia and that this week’s CPI and PPI data suggest that inflation is still not yet really beginning to come down. However, some elements of it may be improving slightly.
While Powell’s post FOMC meeting statement last Wednesday appeared to rule out the prospect of a 750 basis point rise being imposed at June’s FOMC meeting, he didn’t dismiss it altogether. A continuing severe rise in inflation could change this, and forthcoming inflation data releases will obviously be watched closely to see if any such rises are likely. Given the Fed’s preferred inflation measure, the PCE tends to track lower than the CPI, the likelihood of the central bank being forced into taking such extreme measures may be diminished. Nevertheless, the threat remains, and even the prospect of a series of 50 basis point rises has had a fairly devastating effect on equity markets and, somewhat surprisingly to us, on gold too, so imagine what a 75 basis point rise might do?
The Fed also has the task of keeping the jobs market under control and the economy. If inflation continues to remain high, there’s a good chance the unemployment rate will start to rise, too, undoing the positive progress that has been made to date. History is not on Powell’s side in the Fed being able to engineer the proverbial soft landing outcome given the plethora of adverse market influences continuing to face the US and the world’s economies, not least the global rise in energy prices and the lingering impact of the Covid pandemic as new variants continue to manifest themselves around the globe.
The latest decline in the Shanghai Gold Exchange (SGE) gold withdrawal figures for April, to the lowest level since mid-2020, suggests that the pandemic resurrection in China may be worse than the government there is telling us. There are also reports of a new virus surge in the world’s second-most populous nation, India, the world’s second-largest gold consumer – neither of which can be positive news for the gold price, which has mostly been trending weaker recently.
The April Consumer Price Index (CPI) figure came in yesterday at up 8.3% year on year. Although that was marginally lower than the 8.5% for March, it was still above the consensus forecast of an 8.1% raise. While the gold price fell initially, it quickly regained its lost ground and put on a few dollars, while the dollar weakened a little. Silver and platinum also managed to move higher, although they came off sharply in early trade today.
Bitcoin and equities fell hard again too over Wednesday, suggesting a further decline in investor confidence. The Dow and S&P had seemed to be making some gains after a poor start, no doubt because the initial reaction was that the latest CPI figure was not seen as too bad, but then followed the NASDAQ down sharply later in the day. Bitcoin also ended the day at its lowest point for some considerable time.
The CPI figure was perhaps not quite as high as some had feared, hence the better initial equities performance, and certainly reduced the prospect of anything worse than a 50 basis point rise at the next FOMC meeting.
The next CPI release data release date is June 10th, just a few days before the June FOMC meeting, which starts on the 14th. If there are no more inflation shocks, then market reaction to implementing the seemingly inevitable next 50 basis point rate increase could be enough to take the Dow down another few hundred points and bitcoin down to $20,000 or below! This will likely be the case if there is no indication at the subsequent statement that there would not be a further 50 basis point increase applied at the following late-July FOMC event.
This writer has always expressed confidence in the likely future progress of the gold price in the current inflationary economic environment. The economy is verging on stagflation, or even worse on recession. Gold’s poor performance over the past several weeks has put this confidence to the test, but the conclusion is that the yellow metal will win out in the end, as it has tended to do. After all, it is still one of the few investment assets still in positive territory year to date, albeit only up by around 3% now, but that might be considered a sterling performance given the Dow is down around 13% over the same period, the NASDAQ almost 20% and the S&P 500 around 18%. How much further equities may yet come down remains to be seen, but some analysts are predicting more in the same vein to come.