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CPI reveals poetics economics are needed to define recent moves in precious metals

Commentaries & Views

Come writers and critics who prophesize with your pen and keep your eyes wide, the chance won’t come again …. Your old road is rapidly aging. Please get out of the new one, …  For the times, they are a-changin' …. Bob Dylan

Assumptions by economists, analysts, and market technicians that have been valid and insightful in providing meaningful clarifications used to be much simpler to understand. That comprehension has undergone a subtle but profound change recently. Forces that create bullish or bearish momentum have become much more complicated with nuances that look more like puzzles than a simple relationship.

Gold for example has been for hundreds of years sensitive to levels of inflation with higher inflation leading to higher gold prices. The opposite is true for the relationship between gold and the current level of interest rates. Because gold has no inherent investment return unlike stocks or bonds it cannot generate cash flow in the form of profits dividends or interest payments. Therefore, during times in which interest-bearing instruments have high yields market participants favor the inherent safety and guaranteed returns of government bonds and notes.

For the most part, these assumptions still hold in many instances but in today’s complicated economic environment, basic economic relationships have become much more complex and less clear-cut.

Today the government released the latest consumer price index numbers revealing that headline inflation (which exempts energy and food) slowed down on a month-over-month basis. Inflation gained 0.1% in March much lower than the 0.4% increase in February. The CPI index for all urban consumers increased by 5% YoY, the lowest level of inflation in almost 2 years. When compared to the inflation level of 6.2% in February it means that inflationary pressures have slowed for the ninth straight month in March primarily due to food and energy costs declining.

In the case of gold’s reaction to today’s inflation numbers gold moved higher by just over ½ %. As of 5:15 PM EST gold futures basis, the most active June contract is up $10.40 and fixed at $2029.

The reason gold had a modest advance in light of declining inflation is that gold is reacting to both levels of inflation and interest rates simultaneously and today’s lower inflation numbers suggest that the Federal Reserve's recent actions have had an impact on reducing levels of inflation which might allow them to factor this into their current monetary policy by raising rates to a lesser degree and pausing rate hike sooner.

Market participants have been anticipating a major pivot in the Federal Reserve from monetary tightening to monetary accommodation which would mean cutting rates rather than raising rates. This assumption has been incorrect. The Fed has been steadfast in raising rates at every FOMC meeting in March 2022. They have emphatically stated that they will keep the current rates elevated for an extended time. However, the Federal Reserve has been on record saying that they will pivot from raising rates to first pausing rate hikes before cutting rate hikes when and only when the data reflects that inflation is on a sustained path to their target level. The fact that we have seen inflation decline for the last nine months could be the data that confirms that inflation is on a sustained path moving towards its target.

While there are still defined relationships between gold, inflation, and interest rates they have become much more complex and nuanced than they were years ago.

In the words of Bob Dylan, Come writers and critics who prophesize with your pen and keep your eyes wide …. For the times, they are a-changin'.

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Wishing you as always good trading,

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