Inflation remains low, while Powell signals dovish Fed for years. Good for gold.
The US CPI inflation rate declined 0.1 percent in May, following a 0.8 percent drop in April. The decrease was mainly driven by decreases in energy, transportation and apparel prices. The core CPI also declined 0.1 percent, following a 0.4 percent drop in April. It was the third consecutive monthly decline, which happened for the first time in history of the index that starts in 1957. Anyway, compared with the previous month, we see some stabilization of disinflation forces, at least on a monthly basis.
On annual basis, the overall CPI increased just 0.2 percent (seasonally adjusted and merely 0.1 percent without the seasonal adjustments), following 0.4 percent increase in April. It was the smallest 12-month increase since October 2015. The core CPI rose 1.2 percent over the last 12 months, compared to the 1.4 percent increase in the previous month. It was the smallest increase since March 2011. Both indices are substantially lower than a few months ago. The chart below shows these disinflationary trends.
The softening inflation could theoretically reduce the demand for inflationary hedges, but it also means that the Fed will remain dovish for years, which should support gold prices overall.
Powell’s Press Conference and Gold
In last edition of the Fundamental Gold Report, I mentioned the last Powell’s press conference, but I would like to point out a few more things. First, he said that the Fed is considering to target the yield curve, similarly to the Bank of Japan. If adopted, such policy should imply ultra lowinterest rates for longer, supporting the gold prices.
Second, Powell signaled also that the interest rates will remain low at least until the unemployment rate will not return to normal:
So, I think we have to be humble about our ability to move inflation up, and particularly when unemployment is -- is going to be above most estimates of the natural rate for -- certainly above the median in our -- in our -- in our SEP, well through the end of -- past the end of 2022.
It means that even if inflation goes up, the Fed will not react in a hawkish manner as long as unemployment rate is below the natural rate of unemployment. Given that inflation has recently declined, the Fed’s dovish bias is almost certain. And what is important here is that Powell expects a significant slack in the labor market. In other words, the coronavirus crisis will lead to permanent job losses:
My assumption is that there will be a significant chunk -- chunk, well into the millions. I -- I don't want to give you a number because it's going to be a guess, but well, well into the millions of people who -- who don't get to go back to their old job and in fact, there isn't a -- there may not be a job in that industry for them for some time. There will eventually be, but it could be some years before we get back to those people finding jobs
Third, Powell is worried about the second wave of coronavirus cases. He believes that it might be another factor behind the gradual recovery, not necessarily a V-shaped one:
I think, that if a -- if it happens -- you know, the -- the issue would be, first of all, people's health, but secondly, you could see a public loss of confidence in -- in parts of the economy that will be already slow to recover, so it could hurt the recovery, even if you don't have a national level pandemic, just a -- just a series of -- of local ones -- of local spikes could -- could have the effect of undermining people's confidence in traveling, in restaurants, and entertainment, anything that involves getting people together in small groups, and feeding them, or flying them around, those things could be hurt. So, it would not be a positive development, and I'll just leave it at that.
And Powell might be right. As the chart below shows, the number of the US daily cases have been rising recently, probably due to massive riots on American streets.
Implications for Gold
What does it all mean for the gold market? The recent Powell’s press conference indicating that there is still a long way to recovery was a cold water for many stock market investors (but not for our Readers, as we have been warning for many weeks that the investors’ optimism about the V-shaped recovery may be not really founded in reality). People also started to worry that new virus infections could stunt the pace of the economic recovery. In consequence, both the Dow Jones and SP 500 indexes suffered their biggest weekly percentage declines since March. The weaker risk appetite should be positive for safe-haven assets such as gold. Moreover, lower inflation with uncertain recovery imply a dovish Fed and the ZIRP to stay with us for years, which – from the fundamental point of view – should also support the gold prices.
Want free follow-ups to the above article and details not available to 99%+ investors? Sign up to our free newsletter today!
All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' employees and associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
Recommended Content
Editors’ Picks
AUD/USD holds above 0.6500 in thin trading
The Australian Dollar managed to recover ground against its American rival after AUD/USD fell to 0.6484. The upbeat tone of Wall Street underpinned the Aussie despite broad US Dollar strength and tepid Australian data.
EUR/USD comfortable below 1.0800 lower lows at sight
The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.
Gold pulls away from daily highs, holds above $2,200
Gold retreats from daily highs but holds comfortably above $2,200 in the American session on Thursday. The benchmark 10-year US Treasury bond yield stays near 4.2% after upbeat US data and makes it difficult for XAU/USD to gather further bullish momentum.
Google starts indexing Bitcoin addresses
Bitcoin address data is live on Google search results after users realized on Thursday that the tech giant started indexing Bitcoin blockchain data. However, mixed reactions have followed the tech giant's reversed stance on the cryptocurrency.
A Hollywood ending for fourth quarter GDP
The latest revisions put Q4 GDP at 3.4%, the second fastest quarterly growth rate in two years. Much of the upside was attributable to stronger consumer spending, yet fresh profits data affirmed it was a good quarter for the bottom line as well with profits up by the most since the Q2-2022.