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Inflation climbs higher, but gold closes sharply lower

Commentaries & Views

The inflationary rate according to the PCE (Personal Consumption Expenditures Price Index), the preferred inflationary index that the Federal Reserve uses rose sharply to a 13 year high in June. However, it came in under analyst expectations and forecasts, which was one factor that took gold prices lower on the last trading day of July 2021.

The PCE price index rose 0.5% in June taking the one-year inflationary change to 4% according to the United States Bureau of Economic Analysis (BEA). It took a combination of four concurrent monthly major upticks in inflation to raise inflation to 4% over the past 12 months. The last time the PCE price index was at this level was in 2008.

The Federal Reserve’s target has been to maintain an inflationary rate of approximately 2%, this year the fed adjusted its mandate to focus on maximum employment and let inflation run hot. But the fact that inflation based on the CPI is at 5.4%, and now the PCE price index which strips out food costs in energy is double the Federal Reserve’s target it must be running hotter than the Fed expected.

During the press conference held by Chairman Powell this week, he acknowledged that inflation has risen much faster this year than he and other senior Federal Reserve members predicted. He also acknowledged that is possible that inflation “could turn out to be higher and more persistent than we expected.”

The Fed continues to maintain that the current inflationary rate is transitory because rising prices are almost entirely the result of the reopening of the U.S. economy. He blames much of the inflationary pressure is due to supply bottlenecks saying, “Supply bottlenecks have been larger than anticipated.” He also added that “Once these bottlenecks abate and the economy returns to normal.”

While some analysts agree with the Federal Reserve’s assumption that inflation is for the large part a transitory scenario, many analysts believe that the current uptick in inflation is not all transitory citing recent dramatic rises in food cost and energy.

Regardless of the statements by Chairman Powell inflation even using their preferred index which strips out food and energy costs, inflationary pressures are at a dramatic and alarming high. More importantly, because the Fed is assuming that inflation will likely slip back to a number closer to the Federal Reserve’s 2% target next year, if they are wrong, the implications would be alarming.

As of 5:51 PM EST gold futures basis, the most active December 2021 Comex contract is currently down $18.90 and fixed at $1816.90. On a technical basis, we saw a resistance enter the market as gold broke through both its 200-day moving average yesterday, but stalled just below the 50-day moving average. Today gold prices opened just above the 50-day moving average at $$1831.10. Today gold opened at $1832.50. Therefore, the 50-0day moving average is a critical price point that must be breached on a closing basis next week if we are to see the strong price increases witness yesterday marks the continuation of a rally next week.

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