Stagflationary concerns send gold to the key $1800 level
In this column last week, I mentioned the importance of asharp $30 intraday reversal which took place in the gold price on the last “booksquaring” trading session of Q3. Technically, this sudden move back above $1750 held the gold price inside thebullish symmetrical consolidation triangle that has been forming over the past14 months.
Since thebeginning of Q4, the gold price has been biding its time until key inflationreports were issued this week, trading in a tight $30 range no matter what hashappened. Each time the bears made a push towards $1750, buyers showed upquickly. And each time the bulls took gold towards resistance at $1780, sellerscame in to knock the price back down.
But the goldaction beginning this Wednesday was different, as both gold and silver brokehigher out of a month-long consolidation surrounding the issuance of the U.S.Consumer Price Inflation (CPI) report an hour before the U.S. stock marketopened.
Theschizophrenic gold price action mid-week began when the headline CPIfor September camein at 0.4% month-over-month, 0.1% higher than expected, and the core rate wasup 0.2%, in line with the consensus. With computer algorithmic trades set tosell a slight uptick headline in annual CPI data, due to Fed taper concerns,the gold price sold off all of its $18 gain immediately.
However, afterinvestors began reading over the data stating food prices, energycosts, utilities, and new vehicles have been rising four consecutive months andshowing 5+% inflation, the Fed’s transitory argument became more suspect. Thevolatile Comex session ended with the gold price zooming towardsthe key $1800 level.
There isstrong resistance at the $1800 level in gold, which also coincides with themetal's 200-day moving average. The volatile price action mid-week showedinvestor demand for bullion overwhelmed theshort-term trader selling, which could be the sign of an importantshift in the precious metals market. Both gold and silver have developedan inverted head and shoulder pattern on their respective daily charts. Thisbullish technical pattern could be targeting the descendingtrend line atthe $1840 level in gold.
Meanwhile, worseningsupply chain disruptions and a raging energy crisis have joined forces recentlyto reawaken fears of a stagflationaryblow to the globaleconomy. With energy bills skyrocketing, companies are seeing profitmargins get squeezed and passing those costs down to consumers, at a time whensupply bottlenecks are already restraining growth as central banks are movingtowards higher rates.
The term"stagflation" was first used in the United Kingdom by politician IainMacleod in the 1960’s, while he was speaking in the House of Commons. Atthe time, MacLeod was talking about inflation on one side and stagnation on theother, calling it a "stagnation situation." It was later used againto describe the recessionary period during the 1970’s following theoil crisis, which fueled the gold price to soar from $110 in 1976 to $850 perounce by January of 1980.
With thecurrent Fed view being that inflationary pressures are likely “temporary,”1970’s Fed Chair Arthur Burns insisted that the spike in inflation wastransitory as well, even as prices shot up at double-digit percentages monthafter month. This notion that inflation will just fade is something that hasvery painful memories for economist Stephen Roach back in the 70’s.
In a Quartz interview this week, Roach, who worked closely withArthur Burns in the 1970’s, stated “(Burns) forced us to create price indexesthat took out the special one-time recurring glitches....we actually created somethingthat didn’t exist back then, the first core CPI, where we stripped food andenergy out of the CPI. We kept, in Burns’ insistence, taking more things outbecause more price pressures started showing up in things like used cars andhome ownership and women’s jewelry and mobile homes. All sorts of things.”Roach continued, “We took so much out, we didn’t have much left and that wasstill rising, and only then did the Fed and Burns concede that we had aninflation problem.”
Earlier thisweek, the International Monetary Fund (IMF) trimmed its global growth forecast, citing rising risks from supplychain bottlenecks, price pressures, and threats from the delta variant. In itsWorld Economic Outlook, the IMF said its 2021 global growth forecast is now at5.9% from the previous July estimate of 6%.
For now,however, inflation risks are "skewed to the upside," while growth risksare "tilted to the downside," the report pointed out. "Inflationrisks are skewed to the upside and could materialize if pandemic-inducedsupply-demand mismatches continue longer than expected." The IMF iswarning the Federal Reserve to prepare to tighten its policy. Thesestatements by the IMF echo what took place in the 1970’s, which describes anenvironment of higher inflation and lower growth, known as stagflation whengold thrives.
The FederalReserve signaled on Wednesday it could start reducing its crisis-era supportfor the U.S. economy by the middle of next month, with a growing number of itspolicymakers worried that high inflation could persist longer than previouslythought. Though no decision on a "taper" of the U.S. central bank's$120 billion in monthly asset purchases was reached at its Sept. 21-22policy meeting, "participants generally assessed that, provided that theeconomic recovery remained broadly on track, a gradual tapering process thatconcluded around the middle of next year would likely be appropriate,"according to the minutes of that meeting.
After therelease of the September CPI this week, the more persistent inflation pressure figurepretty much guarantees the Fed will begin its tapering in November, and itcould be more aggressive than what Fed Chair Jerome Powell had described amonth ago. Investors are looking for signs from the Fed that the central bankis finally going to admit that inflation is more persistent than transitory,which will continue to drive rate hike expectations. The CMEFedWatch Tool alreadyshows that markets are pricing in a 40% chance of a rate hike by June 2022.
The lastrate-hike cycle began in December of 2015, which is also when gold made asignificant low at $1054. This bottom also marked the beginning of Phase 2 ofthe secular bull market in gold that began at the turn of the century. Headinginto this significant bottom in bullion, gold stocks had already begun to createa flat bottom six months prior to the gold low.
In thiscolumn last week, I also mentioned the miners beginning to show relativestrength to the goldprice since the last trading session of Q3. This is evidence of smart moneybecoming fixated on the stagflationary pressures now more evident in themarketplace.
After risingfor the past 10 of 11 sessions from deeply oversold levels, the GDXJ became short-term overbought on Thursday when the RelativeStrength Index (RSI) reached the 70 level on a daily basis. With the miningcomplex at historic lows in relation to over-priced equities, this is a greattime to begin scaling into quality precious metals juniors on weakness beforethe next up-leg is confirmed in this secular gold bull market. If you require assistance in doingso, and would like to receive my research, weekly newsletter, portfolio, watchlist, and trade alerts, please click here for instant access.
By David ErfleContributing tokitco.com
Follow @KitcoNewsNOW
newsfeedback@kitco.comwww.juniorminerjunky.com