LAWRIE WILLIAMS: Gold breaches $1,800 but falls back yet again
Depending on how one analyses them, the latest U.S. Consumer Price Index (CPI) and Producer Price Index (PPI) figures, which were announced on Wednesday and Thursday, were either encouraging, if one looked at the year-on-year headline comparisons, or non-committal to continuing disturbing if one looked at the core figures. Headline y-o-y CPI came down to 8.5% in July, the same as in May, but well below the shock 9.1% recorded in June. Likewise the PPI also fell by 0.5% in July compared with June, but worryingly, if one strips out the volatile fuel and food elements the underlying core trend was flat to positive and with the possibility that there could yet be further strain on food and energy prices. With no end yet in sight to the Ukraine war we look likely to see higher than acceptable inflation levels for some time to come yet. Certainly the Fed’s target level of 2% inflation seems far, far away.
However, the levelling down of the headline figure did prompt the equity markets to generate some enthusiasm with the general opinion that the Fed may yet consequently tend to be rather less aggressive in its interest rate raising programme. Thus equity prices, which had already received a boost from the previous week’s well above expectation employment figures, continued on an upwards path.
We would offer a word or two of caution here for equity investors. Inflation certainly has not yet gone away as can be seen from the continuing high core inflation figures. Indeed core inflation may still be on the up. There is some continuing evidence, though, that energy prices are coming down – for example the latest oil price quote is US$90.21/barrel, down from well over $100 only just over a week ago, but oil prices can fluctuate and the reduction may not last, given continuing global supply uncertainties around Russian oil exports due to the Ukraine war.
The rise in equity prices was largely because of the feeling in the U.S. that the lower headline inflation levels may cause the Fed to be less aggressive in its interest rate raising programme at next month’s FOMC meeting. While the CME’s Fedwatch Tool participants just about agree, they currently only put the odds at 56.5:43.5 for a 50 basis point increase rather than a 75 basis point one – hardly a huge vote of confidence for a lower rate rise. However the FOMC meeting is five weeks away yet and there will be another CPI and PPI data announcement before then, so there is plenty of time for expectations to change and be re-assessed.
As for gold and silver prices, both advanced well following the inflation data announcements and the market expectations of a less aggressive Fed. The gold price ended the week above $1,800 again, after failing to hold that level a couple of times in intra-day price movement during the week. Silver did even better in percentage terms ending the week at $20.87, up almost 3% on the day. The Gold:Silver Ratio came out at a respectable 86.44 after spending recent time in the 90s. However these higher prices were not sustained in Asian and early European trade this morning and came down quite sharply so far. It will be interesting to see what U.S. markets make of the situation when they trade as they remain the principal global price drivers.
We do have faith in the gold price in particular moving forward between now and the year-end and we feel that a $1,900, or even a $2,000, price is yet achievable. The silver price does tend to follow gold upwards, often in a more exaggerated manner, although its upwards path could yet be slightly hindered by its principal demand areas nowadays being in the industrial sector and these could suffer if a serious recession strikes. Much of the world seems to be in one already and the U.S. is in denial, although is already in a technical recession as defined by two successive quarters of shrinking GDP.