How Will the New CPI Data Affect the Gold Market? / Commodities / Gold and Silver 2022
Fresh inflation data is to be releasedtomorrow. While it may trigger daily fluctuations, the precious metals’medium-term fundamentals remain bearish.
Stuck in Reverse
While risk assetsattempted a daily rally on Oct. 11, Bank of England (BOE) Governor AndrewBailey spoiled the party with his hawkish warning to U.K. pension funds. Afterrestarting QE to curb the rapid rise in U.K. interest rates, he said:
“My message to the fundsinvolved and all the firms is you’ve got three days left now. You’ve got to get this done. The essence of financial stability isthat [intervention] is temporary. It’s not prolonged.”
Thus, while gold buckedthe trend, it was another down day for silver, mining stocks and the S&P500. Furthermore, with Fed officials undeterred by the financial market volatility, Cleveland FedPresident Loretta Mester said on Oct. 11:
“Unacceptably high and persistent inflation remains the keychallenge facing the U.S. economy. Despite some moderation on the demand sideof the economy and nascent signs of improvement in supply-side conditions,there has been no progress on inflation.”
She added:
“Given current economic conditions and the outlook, at this pointthe larger risks come from tightening too little and allowing veryhigh inflation to persist and become embedded in the economy.”
As a result, Mester reiterated that a dovish pivot is out of touchwith fundamental reality.
Please see below:
Source: Reuters
Therefore, with central bankers ignoring investors’ cries for help, suddenly, buying the dip isn’t soprofitable anymore (you have been warned). However, with the Consumer PriceIndex (CPI) scheduled for release on Oct. 13, volatility could be amplifieddepending on the result. As such, while material intraday swings could be thenorm for the foreseeable future, the PMs’ medium-term fundamentals remainprofoundly bearish.
To that point, with Big Tech a major driver of the S&P 500’sperformance, rate hikes and quantitative tightening(QT) should weigh on both. Likewise, since the GDXJ ETF is morecorrelated to the S&P 500’s movement than its precious metals peers, the junior miners are caught in the crossfire.
Please see below:
To explain, the dark blue line above tracks central bank liquidity,while the light blue line above tracks the combined market capitalization ofApple, Amazon, Meta Platforms, Alphabet, Microsoft, Netflix, and Tesla. If youanalyze the relationship, you can see that quantitative easing (QE) and lowinterest rates were a boon for Big Tech post-GFC.
However, with the trend reversing, the Fed needs to remove liquidityto quell inflation, and the policy stance should continue to suppress BigTech’s multiples, while the GDXJ ETFshould underperform gold as the drama unfolds.
In addition, while investor sentiment remains highly depressed, theeconomic impact of the liquidity drain has been relatively minimal outside ofthe U.S. housing market. Moreover, with the Atlanta Fed projecting resilientreal GDP growth in Q3 and demandoutweighing supply in the U.S. labor market, the economic climate isn’t as badas the daily price action suggests.
However, with more ratehikes needed to suppress demand, a sharp rise in bankruptcies could spark thenext bout of panic.
Please see below:
To explain, Bank of America counted recession (the light blue line)and bankruptcy stories (the dark blue bars). If you analyze the relationship,you can see that bankruptcies often move in lockstep with recessionary fears.
However, the right side of the chart shows how bankruptcy storiesremain well below recession stories. Yet, that gap should close in the monthsahead, as money-losing companies that rely on debt/equity financing to survivecould be the next shoe to drop.
For context, I wrote on Oct. 10 that Minneapolis Fed President NeelKashkari noted the issue on Oct. 6. He said:
“I fully expect that thereare going to be some losses and there are going to be some failures around theglobal economy as we transition to a higher interest rate environment, andthat’s the nature of capitalism.
“We need to keep our eyesopen for risks that could be destabilizing for the American economy as a whole.But to me, the bar to actually shifting our stance on policy is very high. Itshould not be up to the Federal Reserve or the American taxpayer to bail peopleout.”
As a result, with Fed officials warning investors they're on theirown until inflation subsides, a cold winter should confront risk assets.
More Employment Strength
I’ve long warned that a demand-driven U.S. labor market is bullishfor Fed policy, and as long as the employment outlook remains constructive, thecentral bank should make life difficult for gold, silver, mining stocks, andthe S&P 500. I added on Oct. 10:
While I stated on Sep. 22that a resilient U.S. labor market gives theFed the green light to hammer inflation, Waller made the point for me.
Please see below: 
Source: Bloomberg
So with more supportivedata hitting the wire recently, the results are bullish for the U.S. federalfunds rate (FFR), the U.S. 10-Year real yield and the USD Index.
For example, the Conference Board released its Employment TrendsIndex (ETI) on Oct. 10. The headline index increased from 118.48 in August (adownward revision) to 120.17 in September. Frank Steemers, Senior Economist atThe Conference Board, said:
“Some easing to labor shortages is expected as the demand forworkers diminishes. However, recruitment and retention difficulties will notdisappear as the unemployment rate is only projected to rise to around 4.5% in2023 and labor supply remains challenged. In this environment, wage growth mayalso remain elevated. Companies will need to prepare for continued laborshortages and further improve their sourcing and retention strategies to remaincompetitive.”
Thus, while demand destruction is the perfect ingredient for adovish pivot, we’re far from that scenario.
Please see below:
On top of that, the NFIB released its Small Business Optimism Indexon Oct. 11. The headline index increased from 91.8 in August to 92.1 inSeptember. Moreover, the NFIB’s jobs report (released on Oct. 6) revealed:
“64% reported hiring ortrying to hire in September, up one point from August. Eighty-nine percent of those owners hiring or trying to hirereported few or no qualified applicants for their open positions. Twenty-sevenpercent of owners reported few qualified applicants for their open positionsand 30% reported none.”
In addition:
“Small business owners’ plans to fill open positions remain high,with a seasonally adjusted net 23%planning to create new jobs in the next three months, up two points fromAugust.”
Therefore, despite the Fed’s efforts, small business labor demandincreased month-over-month (MoM).
Please see below:
Source: NFIB
Also noteworthy, the percentage of small businesses with at leastone unfilled job opening is closer toits all-time high than its pre-COVID-19 level.
Please see below:
Source: NFIB
Add it all up, and the U.S. labor market remains on solid footing.Likewise, while Wall Street assumes its gloomy mood can influence Fed policy,the reality is that Main Streetconsiders inflation more problematic than decelerating demand.
Please see below:
Source: NFIB
To explain, the red rectangles above show how inflation and the costof labor are high on the list of small businesses' "single most importantproblem." In contrast, the percentage of respondents citing poor salesdeclined from 4% in September 2021 to 3% in September 2022, and the currentreading is only 1% above its all-time low.
As such, the Fed still has plenty of room to raise the FFR beforethe U.S. labor market suffers, and a realization is profoundly bearish forgold, silver, and mining stocks.
The Bottom Line
With the ‘’good news is bad news’mantra maiming the bulls, a resilient Main Street is highly bearish for WallStreet. Moreover, with the S&P 500 and the GDXJ ETF selling off mid-day onOct. 11, anxiety is contagious. So while the CPI release could be a ‘sell therumor, buy the news’ event, the PMs and the S&P 500’s fundamental issuesare far from solved.
In conclusion, the PMs were mixed on Oct.11, as gold ended the day in the green. Conversely, the U.S. 10-Year real yieldended the day flat, and the USD Index delivered a similar performance. However,the Fed’s inflation fight is bullish for both metrics, and they should hithigher highs in the months ahead.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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