Gold Heartbeats: Inflation, A Running Theme

Goldex Team

Editorial content

Inflation again was the key theme in the last two weeks. Anecdotal evidence of the previous months as well as input prices are finally starting to show in the main numbers. Across many sectors prices are moving higher, and more importantly moving higher than expected.

Starting with employment in the United States, the below chart from @pboockvar (Twitter) shows that smaller firms are struggling to fill their vacant job openings at the most aggressive pace on record:

And this is with US job openings soaring:

US job openings in February reached highest rate on record

This may be due to wages not being higher enough for people to move from existing jobs, or it may be also a combination of wages not being high enough for people to move who are still or have been on government employment programmers due to the pandemic. Either way, as inflation starts to affect the consumer, it can be seen that it will become a more political issue, especially when the below chart (Bloomberg, BLS) shows that inflation has the least consequences for people with the highest incomes:

Away from the labour market, at a more macro, top-down level, US politician Thomas Massie recently claimed that “roughly 25% of ALL of the debt accumulated by the United States of America since 1776 was incurred in the last 12 months. This is NOT sustainable”. A look at the chart of the US Federal Deficit shows the consequences of the pandemic recession and how large it was grown (Bianco Research):

Yet, the Federal Reserve seems to be very relaxed about the latest inflation worries.

Fed’s Harker says he does not anticipate inflation running out of control

Dollar at three-week low on tamped down fears over inflation

The word that is being heard time and time again is “transitory”. This means that policy makers are arguing that any inflation surprise is due to the re-opening of the economy as the pandemic subsides and will return to normal after. Whether this will be the case remains to be seen. Yesterday’s US inflation report certainly surprised many:

This was the highest inflation print in 12 years for urban consumers in the US. For the overall headline figure, this was the highest since 2018 (Chart: @JSblokland on Twitter):

Inflation is coming back. Consumer prices climbed more than expected in March, data shows.

This higher-than-expected inflation figure was perhaps helped by the US Pandemic Relief Stimulus cheques. At a consumer level, even usually depreciating assets like used cars are actually moving higher (Bianco Research):

Lumber is having an almost exponential move higher in prices:

Lumber Frenzy Drives Up Home Prices as Suppliers Can’t Keep up

And Goldman Sachs have just increased their copper price forecast significantly:

While Aluminium is about to hit a supply crunch, especially in this era of electric vehicles (Bank of America Research):

Globally, food prices keep moving to new recent highs according to the United Nations:

So, inflation is definitely occurring. And it is definitely occurring in a world still half-stuck in pandemic restrictions, lockdowns and with little travel. If global herd immunity is being approached by the year end and there is a real return to normality, then demand should increase further still.

Yet, the Fed, and other central banks are still in the crisis mindset. It is known they would rather have more inflation than less, but their confidence to control it borders on hubris. Perhaps, it will be different this time though this chart below suggests caution:

Yet for all this talk and evidence of inflation gold cannot seem to move higher aggressively.

However, this may have been due to the stronger US Dollar (gold is priced in dollars mostly). From a technical perspective the key 1700 held and if inflation turns out to be more than transitory then gold can be expected to move higher once again.

Another issue that has been affecting gold is the current bull run of cryptocurrencies. Even one year ago many sceptics dismissed Bitcoin and the like as just bubble assets. While this may be true, or not, the perception now is that they are for many alternatives to gold. Institutional take up has increased, possibly at the expense of gold.

But gold has history on its side and if one looks at the below chart (@dlacelle_IA Twitter), especially the Argentine Peso (-98% of its value) (all currencies versus the US Dollar) it is clear that government debasement of currencies in the long run nearly always benefits gold. It may not be as glamourous or as fashionable or as in vogue as Bitcoin, Ethereum or even Dogecoin but it has done the job for centuries, even millennia.

Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.