Gold Down As Inflation Up
The gold market is seeing some moderate selling today as geopolitical tensions have eased-at least for now. The yellow metal is down today despite the latest reading of the Producer Price Index registering a sharp rise from a year ago. The index showed a rise of 1% from the previous month, with a rise of 9.7% from last January. Estimates were looking for a rise of .5% month-over-month and 9.1% year-over-year. Needless to say, today’s PPI data beat estimates by a wide margin and reinforced the idea that the Fed is clear to begin hiking interest rates at any time now.
The PPI data showed inflation is everywhere as it covered a wide variety of categories. Not only is inflation everywhere, but it also appears to be gaining momentum. This inflationary momentum may give credibility to the idea of the Fed hiking rates by a half-point next month rather than just a quarter-point hike. The last time the central bank hikes so aggressively was in 2000. That half-point rate hike signaled the end of the dot.com stock rally as equities proceeded to decline significantly over the following years.
Whether this time around will bring a similar fate for stocks remains unclear. The Fed has seemingly gone out of its way to avoid upsetting stock investors in recent years, allowing rates to remain at or near zero when perhaps it should have considered a rise more carefully. Despite any bearish effects the Fed hikes may
have for stocks and risk assets, the Fed now finds itself pinned firmly into a corner from which there is no easy escape. If the Fed does not raise rates aggressively at this point, inflation could become really out of control. If the Fed does hike rates aggressively as many feel it should, it does risk a major trend reversal in equities with the possibility for heightened volatility and a major sell-off. The months ahead could, therefore, be filled with major stock selling, rising volatility and a general risk-off mentality. Such a market environment could potentially lead to higher gold prices as investors seek out alternative places to put capital to work.
The gold bulls have done well in recent weeks but their work is far from done. After finally breaching the $1850 level on the upside just yesterday, the yellow metal has fallen back to it today. We expect this level to hold-at least for today-and it could invite some who missed the rally yesterday to jump onto the bandwagon. If the market is unable to hold above the $1850 level, however, trouble could be on the horizon. A close below $1850 followed by a close below $1800 will likely be the bears’ next targets. The bulls, on the other hand, will look to take prices back to last week’s highs near $1870. Market movement between these levels may be viewed as noise and may not attract much buying or selling.