Gold Prices Inching Up

Gold is acting a little more like the inflation hedge it is purported to be, which is just as well as the inflation data and proxies continue to move higher. In the survey below (Axios) approximately 87% of Americans are worried about increasing living costs:

And it is not just households who are talking more about inflation. The below chart from Bank of America shows S&P500 companies (the top 500 US-exchange-listed companies) mentioning the word inflation in their recent earnings conference calls. This is unprecedented in the recent past:

And absolutely there is a correlation between the frequency of inflation mentions (dark blue line) and the actual inflation rate (CPI – light blue line). This could possibly explain some of the inflation companies are seeing. In the hospitality industry, while countries slowly reopen. Finding staff is hard, especially after so many have been on government schemes to provide income support because of the pandemic:

In the commodity space prices continue to rise. Below is the global commodity index:

Shipping and container costs are also the highest in a decade:

Copper still soaring:

Lumber also:

Lumber prices causing higher US construction costs. Meanwhile in Sweden, house prices themselves are also making new highs:

And back to the US, housing starts (i.e. new construction) are the highest they have been since 2006 (@Bilello):

And the agriculture index:

And with the semiconductor shortage causing production delays in brand new cars, and increasing costs, the US used-car market is also climbing fast:

On an individual company level there are plenty of stories like this starting to do the rounds: (CNBC)

Coca-Cola CEO says company will raise prices to offset higher commodity costs

There are plenty more examples across commodity, company, wage and household good inflation data and anecdotes. What the above sample shows, however, is that there is inflation and that individuals and firms are preparing for it, experiencing what inflation there is already and are worried about it. This may explain why slowly but surely the gold price is inching up step by step:

Technically, gold is still holding above the key 1700 low (June 2020 and March 2021) and, with the drawdown in crypto assets in the past few days, is showing its strength as a low volatility store of value.

The recent Federal Reserve meeting offers further hints to the direction of US interest rates and any sign of tightening or mention of anti-inflation measures could create a pull-back in the yellow metal.

However, the Fed, like other central banks, have been reluctant to create any scare about inflation, and as with other central banks and their allies in the media, continue to use the term “transitory”. This implies the current spike is just a blip and will soon revert to its mean.

The problem with this argument is that, as the above charts suggest, higher inflation is already here and is beginning to influence the psyche of firms and individuals.

The second new thing is that people’s expectations have dramatically shifted since the pandemic. For many, the new normal is being on a government-sponsored program either directly or indirectly paying wages from companies that would otherwise be bankrupt.

After a year of this support, at income levels which were like having a job, it is psychologically exceedingly difficult to go back to the commute, the dread, the awful boss, to earn the same money.

This happens to coincide with the Democrats being in power and the huge raft of stimulus and government programmes coming into play. The idea that now everyone can be bailed out has taken a strong hold. While the pandemic brought restricted freedoms, these support schemes and infrastructure projects were the price to be paid to appease the population: “ok, we will put up with these restrictions, but you have to support us financially.”

Unlike in 2008, where it was companies that got most of the bailouts, this time it was the individual. And it is now difficult to put this idea back in Pandora´s box, especially at a time when inequality remains so high and both Universal Basic Income and Modern Monetary Theory are becoming so prominent. They’re beginning to dominate the policy discussion.

And the central facts remain: there is too much debt globally, too many overvalued companies that make no money (and will never make money), that are being supported by an artificially low cost of capital, ever-expanding government spending and central bank balance sheets.

The current policy framework is unlikely to change, even if inflation gets out of control. Governments are taking more control of the economy and will be reluctant to give it up. This should continue to support gold over the longer term.

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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.