Inflation, inflation, inflation
In real estate many agents and investors say the three mostimportant things to the value of a property are location, location, location. Asimilar case can be made for gold with one of the keys and most importantelements to price changes being inflationary pressures. Today it was concernsabout inflationary pressures that took gold moderately higher. While a weakerdollar did provide some tailwinds adding to today's gains in gold, the dollarwas only down by 0.128 points, or -0.14%, and fixed at 93.60.
As of 4:30 PM EDT gold futures basis the most activeDecember 2021 contract is currently up by $12.10 (+0.68%) and fixed at$1782.60. Gold futures opened at $1769.40, traded to a high of $1789.60 and alow of $1767.10 before closing at $1782.60. Gold also traded to a higher highand a higher low than Tuesday's trading range. It must be noted that in thecase of inflation and gold prices it is a double-edged sword, but more on thatlater.
Exactly one week ago, on October 13, the U.S. Bureau ofLabor Statistics released the inflationary numbers for September 2021 vis-? -visthe Consumer Price Index. The report indicated that the CPI for all urbanconsumers (CPI-U) increased by 0.4%, which came in 0.1% above forecastby economists. This means that over the last 12 months collectively, all itemsin the index increased by 5.4% before seasonal adjustment. The components ofthe inflationary index that had the greatest rise were food and energy costs. Thefood index rose 4% over the last 12 months, and the energy index rose over24.8% over the last 12 months.
The current inflationary rate has risen on a year-over-yearbasis to the largest increase since July 2008. In June and July 2021, the CPIrose to 5.3%. Inflationary pressures began rising in November 2020, largely dueto the reopening of the economy. This led to greater consumer demand and supplychain bottlenecks or constraints.
The Federal Reserve has long held a dual mandate of maximumemployment and an inflationary target of 2%. However, the Fed adjusted thatmandate to favor maximum employment letting inflationary pressures run hot. Thethought process of many members of the Federal Reserve is that much of thecurrent inflationary pressures would not be sustained but instead aretemporary. At the same time, employment numbers were still at extremely lowlevels, with millions of Americans unemployed.
Paul Tutor Jones speaks
However, many analysts and economists believed that much ofthe inflationary pressures would be sustained and could lead to a major threatto the U.S. markets and economy. Today one of the top hedge fund managers andbillionaire Paul Tutor Jones in an interview with CNBC, expressed his concernsabout the current level of inflation.
The billionaire hedge fund manager stated that his beliefis that inflation is here to stay, and more alarming is that it poses a majorthreat to the United States markets and economy.
"I think to me the No. 1 issue facing Main Street investorsis inflation, and it's pretty clear to me that inflation is not transitory.It's probably the single biggest threat to certainly financial markets and Ithink to society just in general."
He correctly assesses the current inflationary pressures asa result of the trillions of dollars in fiscal and monetary stimulus that wasused to first to end the recession that was a direct result of the pandemic andthen to aid in the economic recovery of the United States.
One of the most alarming predictions he made is that pricepressures will continue to rise. Considering that inflation ran to a 30-yearhigh in September. This means that most likely the Federal Reserve will takesteps to temper inflationary pressures. Although there are not many tools thatthe Federal Reserve has in its toolbox to combat rising inflation their go-totool is raising interest rates. This is the primary reason that initially highinflationary pressures will be a bullish influent on gold prices but later couldhave precisely the opposite effect.
How inflation is a double-edged sword for gold
This brings us to the double edge sword of inflationarypressures. Initially the dot plot that was presented by the Federal Reserveduring the height of the pandemic inferred that there would be no interest ratehikes through 2021, and 2022. It is now believed that there will be two ratehikes in 2022 to help temper and reduce the record-high inflationary level. Asinterest rates are raised, gold becomes less favorable as a fixed-incomeinvestment such as U.S. debt becomes more favorable.
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Wishing you, as always, good trading and goodhealth,
By Gary WagnerContributing tokitco.com
Follow @garyswagner
gary@thegoldforecast.comwww.thegoldforecast.com