The gold market is sharply lower in mid-morning trade as the latest reading on inflation remained elevated. It was reported this morning that the third-quarter Employment Cost Index showed a rise of 1.3%. This reading was higher than estimates which were looking for a rise of .9%. The 4.4% year-over-year reading falls into the camp of the monetary policy hawks and could drive the Fed to tighten policy sooner than many would like. The possibility of Fed action is fueling a rally in the dollar today while also pushing treasury yields higher.
The Eurozone reported overnight its hottest inflation reading since 2008. October CPI rose 4.1%, a figure that stood well above the September reading of 3.4%.
The notion of higher and problematic inflation is nothing new. The last several months have seen rising prices combined with shipping and supply bottlenecks that are causing a variety of disturbances across the globe. The Federal Reserve has, thus far, maintained its view that inflationary pressures are “transitory” in nature and will likely soon pass. Recent data may suggest otherwise, however, and the Fed could already find itself well behind the inflation curve.
The longer the Federal Reserve and other global central banks choose to ignore the inflation problem, the worse the problem may become over time. If inflation accelerates further, central banks could have little choice left but to begin raising interest rates at a rapid pace. The effects of such central bank action could be serious and far-reaching. A rapid rise in rates would likely squash the economic recovery. As money tightens, the economy could not only slow significantly but could even enter recession again. The spiral lower could take years to overcome and central banks could find themselves right back where they started-having to take rates lower again to boost economic output.
Having already backed itself into a dangerous corner, the fed could very well end up running in circles once again. As it does so, the value of the dollar could decline and decline sharply. A falling currency value not only boosts the inflation scenario, but also can become a major contributor to a slower economy and recession. The bottom line is that there is no simple, easy way out for central banks. Years and years of easy money policies will be paid for, at some point, and may take years to return the global state of monetary policy to a normalized state.
Gold has been trading in a range for months now. That range may soon be broken, however, as the laws
of supply and demand take hold. The bulls still need a breakout above resistance in the mid 1830s to get people excited and attract more buying interest. The bears are looking to take prices down below the $1700 level, on a closing basis, before attempting a run at $1670. A breakdown below this level could signal a new stage of lower prices for gold and could attract a swarm of fresh sellers into the market.