Boost in retail sales knocks gold

U.S. consumer spending jumped by 0.7% in August, boosting the U.S. dollar and sparking another sell-off in gold.

Key Takeaways:

  • After failing at $1,833 earlier this month, gold has dropped 4% so far in September.
  • Retail sales in August beat expectations, signaling a strong recovery through the Delta variant and hurting safe-haven demand for gold.
  • The tight labor market is boosting wages, but low-income workers are no better off because inflation is eating the gains.

Will the Fed turn hawkish?

This week, the Commerce Department released a consumer spending report that showed a 0.7% increase in U.S. retail sales. Retail sales were expected to drop in August in response to a Delta variant-induced slowdown, but the news instead signaled economic strength. The U.S. dollar index took a small jump above 93 in response to the news, but remains below the August high.

Consumer spending report prompted a $63 sell-off in gold.

Gold broke below support at $1,780 and is now floating in no-man’s land around $1,750. The unexpected boost in retail sales made investors question whether Fed policies would turn hawkish sooner than expected. Hawkish Fed policies, such as tapering of asset purchases and raising interest rates, would likely create new headwinds for gold.

Gold hit support at $1,752

September slump

The recent $63 drop has dashed hopes of gold’s September rally. September has historically been gold’s strongest month in terms of price performance, but a rally is starting to look less and less likely. Gold bulls are hoping increased jewelry demand in Eastern nations can support the yellow metal for the rest of the Indian wedding season. At the very least, gold needs to stay above the flash crash floor of $1,680.

Dollar strength causes gold weakness

Workers bear the brunt of inflation

Wages have been rising in response to pressures from a tight labor market. Employers are competing for workers, which sounds great for low-income employees. Unfortunately, those wage increases are getting eaten up at the gas pump, the grocery store, the car dealership, and every other corner of the market where inflation is running rampant.

Stocks, houses, vehicles, and groceries are all exploding in price, and low-income communities are disproportionately paying the price. Rising prices hurt everyone, but it’s not so bad if you own the assets that are appreciating.

Inflation slowed in July, climbing 0.5% during the month compared to 0.9% in June. This could be a signal that inflation has peaked and inflationary pressures are releasing. However, this decrease also might reflect a slight Delta variant-induced economic slowdown rather than a release of underlying inflationary pressures. Transportation costs are still rising, supply chains are still crimped, the microchip shortage is far from over, and $120 billion in central bank stimulus is still being pumped into the economy every month.

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