Inflation Hits 30-year high, Gold Surges

Supply shortages, strong consumer demand, and government money printing pushed CPI to 6.2% in October, a three decade high that has investors pouring into gold.

Key Takeaways:

  • Gold’s momentum this week boosted the price almost $100/oz, past a key resistance level and declining trendline.
  • Markets are adjusting to a new narrative around inflation, and the possibility of a turning point in the global economy.
  • The Fed raising interest rates poses an existential threat to overpriced equities, but investors clearly still perceive this threat as far away.

Gold Takes Off

Yesterday the Bureau of Labor Statistics posted its monthly Economic News Release, which reported that consumer prices rose 6.2% from October 2020 to October 2021. The United States hasn’t seen this inflation rate since 1991.

Gold absolutely loved the news. This is one of gold’s greatest strengths as an asset class – it thrives on news that inflicts damages on most other markets.

On Wednesday morning gold surged to $1,868/oz. The price has jumped nearly $100 in the last week, blowing past its key resistance point at $1,830. It also punched through its declining trendline. If the bullish momentum continues, gold will only need to break a couple more ceilings before hitting new all-time highs.

Gold surges above declining trendline

Looking Bullish

Zooming in a little bit, we see that gold also jumped above its 200-day moving average, another bullish indicator.

The relative strength index (shown in purple below) is close to registering an “over-bought” signal, which typically correlates to short-term tops. However, we expect a bit more upside in the short-term given the current momentum. Ideally gold would come back, stabilize, and bounce off one of the previous points of resistance before making a run at $1,960. This could happen in December, when gold typically experiences some seasonal weakness.

In a gold bull market, opportunities come and go very fast. Dollar cost averaging into the market is always better than trying to time peaks and troughs.

Gold jumps above 200-day moving average

Oh my – CPI at a 30-year High

We have been following the inflation narrative closely since the Consumer Price Index started to rise at the beginning of this year. The federal government had taken unprecedented measures to support the economy during the pandemic, including pumping trillions of newly created dollars directly into Americans’ pockets via stimulus checks.

Everyone knows the statistic: twice as many U.S. dollars exist today than existed before the pandemic.

When inflation bells started ringing, the Federal Reserve assured the market that inflationary pressures were due almost entirely to short-term supply chain disruptions. Data this summer seemed to support that hypothesis. Price increases were occurring in the used car market because of the shortage of microchips, for example.

The economy was growing faster than inflation, the stock market was surging, corporate earnings were solid, and market sentiment was at all-time highs. Gold was falling. Everything rested on the Fed (and for good reason, considering they are one of the most powerful economic engines in the world).

You can’t blame the Fed for trying to stabilize markets by downplaying the threat of inflation. Unfortunately, their hypothesis was wrong, and postponing a threat is not the same as eradicating it.

A Turning Point

Rising prices are no longer contained to certain sectors. Medical care, rent, energy, groceries, restaurant prices, and furniture have all joined automobiles with subsequent record price increases. According to a survey performed by Vistage Worldwide for The Wall Street Journal, 80% of small businesses in the U.S. are facing higher labor costs. Seventy two percent are facing higher input costs from vendors.

The changed narrative sparked a change in market sentiment, though not as much as you would expect. The S&P 500 is currently down 1.5% from its all-time high on November 5th, but inflation has yet to damage sky-high valuations. The real threat to the market is rising interest rates, which the Fed has said will start to occur next summer at the earliest.

S&P drops 1.5% this week but remains strong

U.S. Dollar Jumps Alongside Gold

It has been very interesting to watch the U.S. Dollar’s behavior alongside gold this week. As you can see from the chart below, gold is negatively correlated with the U.S. Dollar Index most of the time, but this week we have seen jumps in both assets.

Usually, a boost in U.S. Dollar would knock gold down, but strong demand for the yellow metal is counteracting this effect.

U.S. Dollar jumps alongside gold

This is yet another bullish indicator supporting the argument that gold’s short-term bear market could be ending.

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