Inflation Beast Roars - Gold Only Modestly Up

The inflation beast is growing stronger. Unfortunately for gold bulls, we cannot say the same about the yellow metal. Is sacrifice going on tomorrow?

“Woe to you, oh earth and sea, for the Devil sends the beast with wrath, because he knows the time is short (...). Let him that hath understanding count the number of the beast,” says the Bible. The current number of the beast is not 6.66%, but 6.8% - this is how high the CPI annual inflation rate was in November.

The number came above expectations and implies further acceleration in inflation from 6.2% in October. It was also the largest 12-month increase since the period ending June 1982, as the chart below indicates.

The latest BLS report on inflation also shows that consumer inflation rose 0.8% on a monthly basis after rising 0.9% in October. The core CPI rate increased 0.5% in November, following a 0.6-percent increase in the previous month. On an annual basis, it jumped 5% after a 4.6% increase in October (see the chart above). So, as , “hell and fire was spawned to be released”.

Indeed, November readings clearly falsify central banks’ narrative about transitory inflation (which was already partially abandoned) and confirm my claim that inflation will stay with us for longer. As a reminder, my bet is that we will see the peak of inflation no earlier than somewhere in Q1 2022. Actually, it might be even a bit later, as the Omicron coronavirus variant could contribute to supply disruptions and add to inflationary pressure.

What’s important here is to remember that current inflation is not merely a supply problem. It’s true that the energy index is surging, but the shelter index is also rising, and it has even surpassed the pre-pandemic level, as the chart below shows. So, inflation has a really broad nature, which makes perfect sense, as it was caused by a boost in the money supply and strong demand. The BLS report confirms this view: “The monthly all items seasonally adjusted increase was the result of broad increases in most component indexes, similar to last month.”

Implications for Gold

The inflationary beast not only reared its ugly head, but it started roaring and growing stronger. The CPI inflation rate jumped to 6.8% in November, and it’s probably not the final number! Actually, it could have been even higher if the Omicron variant of coronavirus had not emerged, slowing down some expenditures.

What does this acceleration imply for the gold market? Well, one week ago I wrote: “My bet is that inflation will stay elevated or that it could actually intensify further. In any case, the persistence of high inflation could trigger some worries and boost the safe-haven demand for gold.” Indeed, inflationary pressure intensified further, which pushed gold prices higher, as the chart below shows.

However, I also expressed concerns about the Fed’s reaction to high inflation and its implications for gold:

I’m afraid that gold bulls’ joy would be – to use a trendy word – transitory. The December FOMC meeting will be probably hawkish and will send gold prices down. Given the persistence of inflation, the Fed is likely to turn more hawkish and accelerate the pace of tapering.

The higher than expected inflation rate in November, and a very modest gold’s reaction to it, only strengthen my fears that tomorrow could be a great day for monetary hawks and a sad day for gold. Given such high inflation, the Fed has simply no choice and must accelerate the pace of the tapering and hiking cycle. So, to paraphrase Iron Maiden, sacrifice is going on tomorrow.

On the other hand, gold often bottomed out in December historically (in recent years, it did so in 2015, 2016, 2017, and 2019). We’ll find out soon whether my fears were justified!

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Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

Arkadiusz Sieron

Hi, my name is Arkadiusz Sieroń. Call me a liar, but I am writing about the precious metals thanks to Arthur Laffer, Alan Greenspan, John Keynes and Fredrich Hayek. Really! Would you like to know how these economists, some of whom have been dead for a long time, triggered my adventure with gold? When I was in high school, I took part in the Entrepreneurship Olympic, one of the biggest thematic competitions for pupils from secondary schools. During my preparations, I studied an academic textbook, in which I came across a Laffer curve. Eureka! If the tax revenues are the same at low and high tax rates, the government should lower them! I did not win the competition, but I achieved much more. I decided to become an economist! And I loved the idea of small government and economic freedom since that very moment. After graduating from high school, I moved to the capital. I was very excited, as I started to study economics at the best economics university in the country. However, the professors disappointed me very quickly. Why? They all were statists, supporting extensive government intervention and fiat currencies. Gold? It is a barbarous relic! Have you not read Lord Keynes? I was very depressed. I even considered giving up my studies in economics and enrolling in the Philosophy Faculty! You can see now that I was really desperate. When I was contemplating nothingness and vanity of vanities, a few of my classmates lent me a handful of fascinating books, such as Capitalism and Freedom by Milton Friedman. I also discovered the publications of the Austrian economists who supported the idea of the gold standard. It sounded crazy in the 21th century, but it was inspiring. I rediscovered the sense of studying economics. I continued my studies and one day I read these words: “Gold and economic freedom are inseparable”. Try guess who wrote them. Don’t give up, try once again. Don’t know? Alan Greenspan. Shocking, right? This is a quote from his “Gold and Economic Freedom”, an article published in 1966. Several years before he became the Fed Chair, and several more before the real estate bubble, that he helped to pump, up burst. Quite ironic, don’t you think? Both his essay and the Great Recession (and the accompanying bull market) motivated me to study investment portfolio management and the precious metals. I became a certified Investment Adviser very soon and I started to work for the biggest pension fund in the country. My corporate career seemed to be very promising. However, I quickly discovered that the company invested most of the participants’ funds into Treasuries or shares of the big state companies. And they didn’t even want to hear about investing in precious metals. I quit. I found a shelter at the university, as a Ph.D. candidate and – after a defense of my thesis about certain negative consequences of inflation (i.e. the Cantillon effect) – as an Assistant Professor. I was finally free to study economics, freedom, and gold. The more I read about gold, the more I was terrified. Most of the so-called experts who write about the precious metals, don’t have any idea about the subject they discuss. They treat gold as a mere commodity. Or they claim that gold is either worthless as it does not bring any yield or that its price should always rise. I was really let down by the state of understanding of the gold market among the analysts and investors. But I could not do too much. Until the sun shined down on me. I got a job offer at Sunshine Profits. I didn’t hesitate a second and accepted it, although many professors discouraged me: “You are a scholar, focus on science and do not write silly newsletters about bullion" -they advised me. But I did not listen to them, as they clearly didn’t understand the nature of gold. It is not a barbarous relic, it is the longest used money in history, and a clinking witness of human civilization. Gold is the asset, which used to serve as the safe- haven and portfolio diversifier for investors from the entire world for years. I wanted to study its properties and to share with my knowledge with people who do not have time for that. I wanted to help investors to better understand fundamentals of the gold market and improve their investment decisions. I’m happy that I can do that at Sunshine Profits. I’m really proud to be a member of our team and provide investors with high quality investment analyses about the gold market.