Inflation Looking Bullish for Gold

The gold price has a few ‘masters’ but history has shown inflation is one of the leading influences.  As fiat currencies lose purchasing power through inflation, gold has maintained it for thousands of years.  Last night, just before tonight’s Fed meeting, we saw Core CPI in the US print 2.2% YonY and Headline CPI print 2.8% YonY.  When you can compare that to real average weekly earnings printing 0.3% YonY you can see similarities with Australia’s wage growth problem.  It’s just not keeping up.

Whilst the market is almost fully pricing in a Fed hike tonight, all eyes will be on the minutes to see how many and how quick from here.  In the past the Fed has held 2% as its target on which it would push and pull the interest rate levers to maintain it.  Since the GFC, amidst trillions of new dollars printed through QE and zero interest rates the Fed has battled to get growth back into the economy.  Now that inflation is finally and clearly on an upward trajectory the Fed has also clearly stated it is prepared to let it overshoot its traditional 2% line in the sand.  Last guidance was around 2.5% and remember they use the Core PCE figure (not CPI) which printed 1.8% for May.  i.e. they may still slowly ease into the next hikes.

With Core CPI printing 2.5% last night there seems little doubt we will see that Core PCE head much higher before the Fed puts the breaks fully on.  By then who knows what Core CPI will be…

At a time of record debt, projected big deficits (the cost of Making America Great Again), and an increasingly wobbly sharemarket, the Fed knows it can’t go too fast.  Already US Treasuries have backed off the highs seen in recent weeks, supporting the case.  The US dollar too is looking to be in overbought territory, acknowledging these headwinds and showing signs of heading back down soon, again a bullish sign for gold.

Inflation is something that can easily get out of control, especially when the foot on the break is too scared to push too hard because the very stimulus that is now playing out through inflation is the very same stimulus that created one of the biggest and broadest bubbles we’ve ever seen.  Good luck Mr Powell.