Inflation finally meets Wall Street’s ears! Is gold next?

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It took a while for Wall Street to discover inflation above 5%, but it seems investors have finally noticed that we are now living in a world of high inflation. I’ve always known that only the smartest minds work on Wall Street! So, right after they finally learned to use a computer and found the BLS website, they got scared and started selling stocks. Consequently, US stock index futures fell yesterday morning.

Okay, I was a little mean to the traders on Wall Street. They panicked not because of the CPI rates but because of soaring oil prices. As shown in the graph below, WTI crude oil recently approached $ 80 a barrel, while the price of natural gas has more than doubled in recent weeks (left axis). By the way, if you want to learn more about the oil, gas and energy sector, as well as follow all the price movements that are happening there (and maybe take advantage of it!), I can recommend you a good place to do it – Oil Trading Alerts.

Rising oil prices have triggered inflation concerns, as higher energy prices could translate into higher consumer inflation, and higher consumer inflation could trigger a pushback. the Fed more hawkish than expected. In particular, the US central bank could cut its quantitative easing faster than expected, especially if September’s non-farm payrolls prove to be decent. After all, good news is bad news for stocks right now, let alone gold.

I have long warned that inflation may be longer lasting than experts claim. Lo and behold, the high inflation numbers could no longer be understated, so the IMF admitted yesterday in its flagship World Economic Outlook report that high inflation could last until mid-2022:

Headline inflation is expected to peak in the final months of 2021, with inflation expected to return to pre-pandemic levels by mid-2022 for advanced economies and emerging market groups of countries, and with risks on the rise.

However, the baseline scenario assumes that inflation expectations remain anchored. And while the IMF is correct that market-based measures of long-term inflation expectations have remained relatively entrenched so far, measures based on consumer surveys have clearly shown, as shown in the graph below.

I don’t know what planet the IMF economists live on, but in my world such a chart shows anything but entrenched inflation expectations. So I would say the upside risks to the IMF’s baseline scenario are more likely than the authors are willing to admit. In fact, even they recognize that the risks remain slightly on the upside in the medium term:

The sharp rise in house prices and protracted input supply shortages in both advanced economies as well as emerging and developing countries, as well as continued pressure on food prices and currency depreciations in the latter group could keep inflation high for longer.

Implications for gold

What does all this mean for the gold market? Well, as usual, I’m forced to say that theoretically higher inflation should be positive for gold, which is seen as a hedge against inflation. However, the theoretical links, which we can analyze in isolation, actually cooperate with other forces, the economy being a complex system. In our case, gold does not benefit much from heightened inflation fears as bond yields rise in tandem, supporting real interest rates. Gold’s disappointing performance in the inflationary environment (see chart below) is also due to the outlook for the Fed’s tightening cycle.

So, it looks like gold may stay in the downtrend for the near future, especially if the report on the employment situation, due for release on Friday, does not disappoint. However, the Fed will have to turn the tide at some point – it won’t hesitate to tackle overheating or stimulate the economy in times of crisis. And that will allow the gold to shine again.

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For an overview of all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Efficient Investing Through Diligence and Care


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