Inflation isn’t going away any time soon. May’s CPI and Consumer Sentiment broke the market’s back. Today’s PPI may have been lighter than expected. But do you really want to wager that the PPI’s consensus “miss” indicates peak inflation in wholesale prices? Only if you’re an unreasonable optimist.
How this changes the economic landscape: The Fed is losing credibility. Its forecast before the inflation surge was a big miss. Its monetary models and calculation were also a big miss. Its measures and solutions will likely be a big miss. The idea of a soft landing is the stuff of fiction. As far as gold safe-haven demand is concerned, it still hovering below recent lows, just waiting for a trigger. And that’s the good news.
What to watch out for: Although gold doesn’t always respond immediately to the dollar’s fluctuations or inflation’s rise, it does respond to public confidence in the Federal Reserve. And that confidence is fading fast. The good news is that bearish Fed sentiment is bullish for gold. And that’s what everyone might want to follow closely.
After a relatively quiet week, the gold market saw some fireworks on Friday as investors reacted to rising inflation pressures.
Economists expected to see a further decline in consumer prices in May; however, the U.S. Labor Department said its Consumer Price Index rose 8.6% for the year in May, hitting a new 40-year high.
Gold price action Friday was impressive, to say the least. In a nearly $50 price swing, gold went from the bottom of its range just above $1,825 to test significant resistance at $1,875 an ounce.
According to many market analysts, the Federal Reserve's credibility is now on the line as investors start to question if the central bank can actually bring down inflation. Although the Federal Reserve is expected to raise interest rates by 50 basis points next week and in July, they remain woefully behind the inflation curve and some significant investors are paying attention.
"The Fed doesn't really have the tools to stop the inflation. When the Fed has to choose between fighting inflation and supporting the Treasury, I think it has to pick the Treasury. At that point, it's best to have some gold," he said in a presentation during the annual Sohn Investment Conference.
But it's not just investors who see gold as an essential asset in a portfolio. Wednesday, the World Gold Council released its annual central bank gold survey. Fifty-seven banks participated in this year's survey, and 25% said they wanted to increase their gold reserves in the next 12 months.
"The planned purchases are chiefly motivated by increasing concern about a possible global financial crisis, although anticipated changes in the international monetary system and concerns over rising economic risks in reserve currency economies are also major factors," the analysts said in the report.
It's not surprising that gold demand is starting to attract new safe-haven demand. Tuesday, the World Bank waved a major red flag, saying that a 1970s-style recession will be difficult to avoid for some countries.