Powell and Gold between Inflation and Global Slowdown / Commodities / Gold and Silver 2018

Powell is apparently between a rock and a hard place.Inflation surged, while the global economy slowed down. What will he do? Andhow will gold react?

InflationJumps in October

The consumer price index climbed 0.3 percent last month,after rising 0.1 percent in September, according to the U.S.Bureau of Labor Statistics. It was thebiggest rise since January, and it was mainly caused by an impressive surge inthe fuel oil (+3.7 percent) and gasoline indices (+3 percent). However, thecore CPI, which excludes food and energy, also rose, advancing 0.2 percent inOctober, following a 0.1-percent increase in September.

Over the last 12 months, the consumer prices jumped2.5 percent, compared to 2.3 percent increase in September. The rebound wasmainly caused by a notably bigger increase in energy prices. Hence, the indexfor all items less food and energy climbed 2.2 percent, the same as last month,as the next chart shows.

Chart 1: CPI (green line, annualchange in %) and core CPI (red line, annual change in %) over the last fiveyears.

How do interpret this data? Well, the inflationarypressure intensified somewhat in October. However, the acceleration was mostly driven by large increases in energy prices.Which are quite volatile – as the next chart shows, the price of oil fell in November, which is likelyto result in lower energy prices and softer pressure on inflation in the nextmonth.

Chart 2: Gold prices (yellow line, left axis, LondonPM Fix, $) and oil prices (black line, right axis, WTI, $) in 2018.

Hence, we claim that the US inflation remains limitedand the Fed is not likely to be worried about it. Given therecent pullback in oil prices, inflation is unlikelyto rise much further from the current level, at least for now. Therefore, weexpect the US central bank to continue its policy of gradually hiking interest rates. Rising rates should support the greenback,which is negative for the gold prices.

GlobalEconomy Slow Downs

However, the Fed officials have made cautious commentsrecently. On Friday, both Fed Vice Chair Richard Clarida and Dallas FedPresident Robert Kaplan raised concerns over a potential global slowdown.
The former said that the federal funds rate is close tobeing neutral, so the further increases should be more based on economic data,especially that global economy might slow down:

As you movein the range of policy that by some estimates is close to neutral, then withthe economy doing well it's appropriate to sort of shift the emphasis towardbeing more data dependent (…) Going forward, you have to look at a lot of trends,including the global economy... Some of it is slowing.
 
Clarida’s remarks were first public comments sincebeing confirmed in September, and they indicate that he might be less hawkish than Powell.

Meanwhile, Kaplan argued that the US economy wouldface headwinds next year as the big boost from fiscal policy (Trump’stax reform and elevated government spending) would begin to fade. He also notedthe global risks:

It’s my ownjudgment that global growth is going to be a little bit of a headwind, and itmay spill over to the United States.

Powell seemed to be less worried about the US economylast week:

I’m veryhappy about the state of the economy right now (..) We’re in a good place, andI believe our economy can grow and grow faster.

And indeed, so far, so good. US industrial production inched up in October,while the retail sales surged last month.However, Powell acknowledged that the global economy was slowing and consideredit as a concerning fact. If the global factors become an important concern forthe FOMC, it maybecome more dovish, which could support the gold prices.

Implicationsfor Gold

After recent comments from the Fed officials andreports on inflation, many analysts argued that Powell was between risinginflation and slowdown in global economy. However, that’s not accuratedescription. Inflation rose in October, but mainly because of jump in energyprices. The core inflation remains stable and the overall CPI may ease in thenear future, given the fall in oil prices in November.

And although the Fed officials noted global slowdown,they still sounded upbeat about the US economy and called for gradualnormalization of the monetary policy.

Hence, the conclusion is clear: do not expect higher gold prices due to the surge in inflation ordovish revolution within the FOMC. Actually, given the drop in oil pricesand historically strong correlation between oiland gold (see Chart 2), we could rather expect downward moves in the yellowmetal later this year.

Thank you.

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Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

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