Inflation’s not transitory and the gold price should move. But when?

We can’t “make the numbers work” to hide the fact that inflation is firmly at our feet. But, we can at least say that we are largely “all in it together” – it’s a global issue. The gold price should move soon in response. But when?

Let’s start here. Currently, gold pricing remains in the months-long range:

On the longer-term chart, it looks like a consolidation pattern for gold:

For some commentators, the inflation we are beginning to experience was already priced in by the gold-price move many years ago. Indeed, as we can see, the 20-year low for gold was USD275. Gold has moved up 600% in 20 years!

However, it makes no sense for everything else to be going up when the gold price is not, despite already having “made the move”. Let’s take a look at what is happening in the markets, especially energy and commodities.

It is well known that for some economists that “when the numbers don’t work, you need to make the numbers work”. Inflation is notoriously difficult to predict, let alone measure. That is why, as is the case in many economic numbers, “lies, lies and statistics” are easy bed-fellows:

The US Federal Reserve is insisting that recent increases in the price of food, construction materials, used cars, personal health products, gasoline, and appliances reflect transitory factors that will quickly fade with post-pandemic normalization. But what if they are a harbinger, not a “noisy” deviation?

The above is a must-read article. It is especially true nowadays. The world has not seen inflation like this for quite a long time.

So, if you don’t like the numbers, just strip out the bad bits…. but even when you do that…. in the US, inflation is still at the highest we’ve seen for the last 28 years:

Unlike the inflation in asset prices (stocks, bonds, housing) that has been seen in recent years and driven wealth inequality, inflation this time around is affecting consumers and, thus, voters. It is becoming political, especially in the United States:

For months now, the US Federal Reserve has tried to convince markets and citizens that the current surge in prices is transitory. “Transitory” is just a technocratic word for temporary or short-term, clearly meaning that after a few months these price levels will subside.

See this article from June: Inflation is hotter than expected, but it looks temporary and likely won’t affect Fed policy yet.

Note how that article compares to more recent discussions: Transitory inflation is a fig leaf that’s slipping or Inflation: Transitory or troublesome?

Only now are a few central bankers starting to say it might not be so temporary: High inflation to last a while, Fed’s Bostic says, and it’s no longer ‘transitory’

The problem is global:

In industry, other commodities are rising as energy costs spiral. Here is the chart for Zinc:

Meanwhile in Asia: China coal prices hit record highs, early winter chill adds to energy woes.

There is a sense of a self-fulfilling prophecy in these moves. It is a vicious feedback loop that shuts down production due to high energy costs, creating scarcity in other key goods and components. Take a look at wholesale power prices in Singapore:

The scary thing is that the highest costs – higher production and living costs – are only starting to be felt. If the cost rises continue, a few things are clear. Every employee will ask for an inflation-matched pay rise, every landlord who can will ask for an inflation-matching rent increase, and every seller of goods will put prices up even further just to break even. We are not there yet but, if the direction of travels continues, it will only be a few months until the pressure starts to choke the economy and politics really comes to the fore.

Staying within the political realm, the result will be more interventions in markets, more debt, and special fiscal programs to help the disadvantaged.. and so the cycle will continue.

For years, cheap energy and cheap labour have fuelled economic growth but global policy makers have triggered a rapid reaction to both.

Firstly, the sense of an unequal society with so many left behind led to more extreme parties gaining traction. Centrist parties, therefore, had to do something to ensure they retained hold of their share of the vote. In the UK, Brexit – at least for some supporters on the left – was an effort to boost wages that had long been suppressed by the EU’s freedom of movement and a resulting excess of labour. A similar argument was made by Trump et al to “Make America Great Again” and re-shore jobs that had been exported to cheaper places, such as China.

At the same time, the world vowed to decarbonise. Investing in any fossil-fuel infrastructure was seen as immoral and ESG considerations took precedence over profit.

The two forces have combined, along with others (most notably easy monetary and fiscal policy), to finally bump inflation to where the central banks had always said they wanted it. Off the record, their view was that inflation at current levels was needed to reduce the “real” value of the huge debt burden created in the last 3 decades. They have got what they wished for. However, the consequences of letting the inflation genie out of the bottle in this interconnected world could be very dangerous.

Ultimately, while gold hasn’t moved yet, at the current rate of inflation it should soon. Why? Either because currencies are being watered down and purchasing power eroded or because the central banks will have to hike interest rates aggressively, which would create havoc in our over-indebted financial system.

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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.