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LAWRIE WILLIAMS: 8.5% US CPI rise sees gold rise again sharply

The latest US Consumer Price Index (CPI) came in today showing an 8.5% year on year increase – higher than most had expected but still perhaps a little lower than the more pessimistic commentators, ourselves included, might have anticipated.  Inflationary pressures are riding particularly high, boosted by the perhaps unintended adverse consequences which have impacted globally and on the U.S. resulting from the stringent sanctions being applied to sectors of the Russian economy over the Ukraine war.

Tomorrow we will get the new Producer Price Index (PPI) data which one suspects will come in comfortably into double digits.  The PPI measures the average change over time in the selling prices received by US domestic producers for their output and had already reached 10% year on year in the previous data release of a month ago.   The PPI data releases don’t quite seem to have the same impact as the CPI on equities and precious metals prices, but it is certainly an even better indicator of the price rises currently being experienced by the U.S. public.  Indeed we suspect the average U.S. consumer may be experiencing higher price rises than these figures might suggest once retail outlets have added their own mark-ups. 

As we have pointed out before, the U.S. inflation data were massaged downwards in the early 1980 s and again in the 1990s by the government wishing to present a better economic picture to the public.  John Williams’ shadowstats.com service calculates the inflation data as it used to be assessed and this would put annual U.S. inflation as perhaps well above 15% - a figure that would probably be better recognised by the consumer as the current reality.

The U.S. Fed is almost powerless to do much about trying to mitigate the high inflation levels.  It takes some comfort in that its preferred inflation data calculation is the Personal Consumption Expenditure (PCE) Index which tends to track a percentage point or so below the CPI, but on current trends the next PCE data release due out on April 29th will probably come out at 7% or more (It was 6.4% year on year at the last data release on March 31st). 

This has generated speculation that the Fed may even raise the Federal Funds interest rate by 75 basis points (it normally only looks at 25 basis point increases if it does raise rates) at the next FOMC meeting in early May, or even before.  Such an increase would certainly be something of a shock to the U.S. economy and to equity prices and, with further rate increases flagged, could quite possibly drive the U.S. economy into a recessionary phase.  And even this well-above –the-norm level of rate rise would probably be insufficient to slay the inflation dragon.

At this unusually high rate level increase, real interest rates would probably still remain in negative territory which, as we have explained before tends to be positive for a non-interest generating safe haven asset like gold.  The silver price would probably benefit too as it still tends to ride on gold’s coat tails, but we’re not so sure about platinum and palladium which are very much dependent on industrial activity and motor vehicle sales, which could both turn down sharply in a period of economic weakness.

The gold price, as we had forecast, did rise sharply today on the high CPI figure and was heading up through the upper $1,970s at one time, before being brought back down again quite sharply to the mid 1,960s.  Silver too was looking strong but ended at around the $25.30 mark after hitting $25.70.   There always seems to be an almost immediate correction when gold and silver seem to begin to show strength. The higher gold price levels, even if only briefly achieved, put the $2,000 psychological level firmly in the sights. 

Somewhat surprisingly U.S. equities and bitcoin moved up as well initially before falling back into negative territory, while the dollar index (USDX) regained the 100 mark.  The oil price rose too, but managed to maintain its early gains ending up back over the $100 per barrel mark.

So where from here?  With the PPI coming out tomorrow and likely to show a significant rise over the reading of a month ago we could well see some further appreciation in gold and silver prices and some more equity weakness too.  We seem to be in a positive phase for gold and silver prices and falling general equities, but the markets are always somewht data driven and consequently volatile so some positive data could quickly reverse this trend.

12 Apr 2022 | Categories: Gold, Silver, Dollar, US, Palladium, Platinum, FOMC, Bitcoin

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