Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Strange Link between Inflation and Gold

Commodities / Gold and Silver Stocks 2018 Feb 15, 2018 - 03:17 PM GMT

By: Arkadiusz_Sieron

Commodities

It was a strange day. Inflation surged yesterday. But gold dropped initially, only to quickly reverse the fall and fly into the air. What happened? And – importantly – will gold soar on the inflation fuel?

Inflation Rears Its Ugly Head (or Tries to, at Least)

The recent payrolls report showed that wages had jumped 2.9 percent in January on an annual basis. It was the best result since 2009, which awakened fears of inflation. That’s why investors awaited yesterday’s data on consumer prices. On Tuesday, we warned our readers: “(…) tomorrow, we will see the newest CPI report, which may affect the markets, given that inflation worries were one of the key reasons behind the recent stock market volatility.”


Indeed, we got a hot CPI print, which shook the markets. The prices jumped surprisingly high. The Consumer Price Index leaped 0.5 percent in January, following a 0.2-percent increase in December, as one can see in the chart below.

Chart 1: U.S. monthly CPI rate (in %) from January 2013 to January 2018.

The boost in energy prices was partially responsible for the move, that’s sure. But the core version of the index, which excludes energy and food, also rose. And it actually accelerated from 0.2 percent in December to 0.3 percent in January. It implies that inflationary pressures may settle in, although the rebound in apparel prices (change from -0.3 in December to +1.7 percent in January) did the job here.

Over the last 12 months, consumer prices went up 2.1 percent, while the core CPI increased 1.8 percent. The growth of both indices was the same as in December. So no acceleration here. Given the unchanged annual inflation rate, the fears of inflation may be overdone. When markets realize this, gold prices may correct.

Gold – Inflation Hedge or Safe-Haven?

Nevertheless, the investors focused on the monthly dynamics, as the January numbers marked the biggest increase in five years, adding to the recent worries about rising inflation. And how did gold react? Try to guess. As a famous inflation hedge, it probably jumped, right? Well, not quite. Surely, it ended a day with huge gains. But let’s look at the chart below. It displays yesterday’s New York gold prices, hour after hour.

Chart 2: New York Gold Price on February 13, 2018.

Please take a good look. Do you see a sharp decline immediately after 8:30? We bet you do. Sorry for saying that, but it was gold’s initial reaction to the CPI report. Look once again – there is no doubt. The inflation rate surprised investors with its strength – and gold dropped. So much for the hedge against inflation, at least in the very short term.

However, the price of gold reversed very quickly, jumping above $1,350. So maybe gold protects against inflation, after all. Maybe. This is the standard story that everybody repeats. We offer you better explanations.

Gold is a safe haven. It started to climb yesterday after the stock market volatility increased again. We mean here the early morning, when U.S. equities fell and the analysts expected another day of declines. However, they ultimately finished higher on Wednesday and the CBOE Volatility Index fell.

Gold is also a bet against the U.S. dollar. The greenback strengthened initially, but struggled to build on its post-data gains, helping the yellow metal to regain its positive traction. The weak data on U.S. retail sales also supported the rally in gold.

Last but definitely not least, traders might just have second thoughts. Initially, they feared that the Fed would be unable to ignore higher inflation and would tighten its stance. But after a while, investors decided that the CPI report would not radically change the U.S. central bank’s medium-term stance. The Fed will remain behind the curve. When the Fed lags inflation, gold smiles. So it is an inflation hedge, in a sense – however, what really matters is not the mere inflation rate, but the Fed’s position against it!

Conclusions

Gold soared on Wednesday. The reason is the stronger than expected inflation data. However, the price of bullion fell initially, which raises some doubts about the sustainability of the rally, especially that the CPI report boosted expectations that the Fed will raise interest rates in March. Luckily for gold, the greenback failed once again, helping the yellow metal to jump above $1,350. It suggests that the markets expect that the U.S. central bank will stay behind the curve – the forecasts of an aggressive Fed would have inclined traders to buy the American currency. Hence, there is room for further upward moves in the gold market.

But don’t bet on soaring consume prices. Inflation expectations don’t suggest that inflation is going to explode. Any gold’s gains related to inflation fears should be, thus, limited.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in