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Inflation runs hot and bids up gold​

15 October 2021

Friday 15 October 2021

In this week's market report:

  • US consumer prices look hot – driving gold higher

  • Markets don’t believe inflation narrative

  • World Gold Council warns of stagflation

  • Gold compared to the world money supply

  • Inside our office this week

  • Before you go...

Shae Russell

Shae Russell,
Group Communications Manager

Dear Investor,

US dollar gold price [XAUUSD]
Daily chart

(Click to enlarge)
Source: Trading View

Gold jumped US$40 per ounce this week: We have movement gold bulls.

Au breaks out: Gold has broken through its short term down trend (black line). The rally during the week was strong, taking the US dollar gold price all the way up to medium term down trend (blue line). This is a critical point for the yellow metal, as gold has met resistance around here in the past.  

All precious metals surprise this week: Gold’s break higher has helped lift the other precious metals in the past 48 hours.  

Managed money offers few clues on what’s to come next: Open interest on the futures market offers little clues on which way gold will go next. Very little has changed and an industry source says we’ll have to wait until Monday to see which way managed money is leaning.

Greenbacks still popular: Keeping the gold price in check is the US dollar.

  • The DXY (a proxy for the value of the US dollar) only dipped around 0.50% on Wednesday to Au’s 2.30% price rise. Telling us the market still values greenbacks over gold…for now.

Bulls, is it time to get excited? A strong move up this week. Perhaps it’s time for some cautious optimism…

  • Moving out of last’s weeks down trend is positive. The US$40 per ounce move caught many short traders off guard.  
  • To confirm this recent move higher, Au needs to hold above US$1,800.

The tussle begins, Bears: Gold meets an old foe, resistance at US$1,790-1,800. If the gold price sells off from here, the bears have technical control.

Gold in Australian dollars remains steady: The complexity of the Aussie dollar is making US dollar denominated investments a challenge for Australians.

  • The fantastic price jump in the US dollar gold price was muted by the stunning rise in the Australian dollar (AUD rose on the back of another trade surplus).
  • There appears to be support for the Aussie dollar gold price around AU$2,390, though XAUAUD has only risen 1.80% since Wednesday.
  • XAUAUD looks to be consolidating, making it an excellent opportunity for those planning to increase their Australian dollar gold position.
 

Australian dollar gold price [XAUAUD]
Daily chart

(Click to enlarge)
Source: Trading View

US consumer prices look hot – driving gold higher

Markets don’t believe inflation narrative: Gold’s big jump tells us the markets doesn’t believe the ‘inflation is transitory’ narrative anymore. This is something I discuss with Nick Frappell in my interview today at the end of today’s update.

  • Core CPI (excludes food and energy prices) for the US came in at 4% for September, which was in line with August. CPI (includes food and energy) rose 0.4% for September, consensus was 0.3%.
  • Food and rent prices jumped 0.9% in September in the US, more than double August’s 0.4% increase.
  • Annual consumer inflation now sits at 5.4% year on year. This is now the fourth consecutive month US inflation has been above 5%.
  • Global supply chains are straining and contributing to price pressures.

 

Will the Fed be forced to raise rates soon? Edward Moya, senior market analyst of OANDA said to Kitco:

‘There's now over 90% chance that the Fed will raise rates by September 2022. There's uncertainty with the global energy crisis and the potential that Biden will make an announcement on China. Investors are scrambling for safe-haven positions.’

While we’re on the subject of inflation…Chinese factory gate prices (producer prices) grew 10.7% year on year reaching a 26 year high. According to Bloomberg there’s no sign (yet) these costs have been passed onto the consumer. Bloomberg’s China economist, David Qu says that may suit the People’s Bank of China (PBoC) just fine, writing: 

‘…in two key measures of China’s inflation -- with producer prices heating up further and consumer prices cooling in September -- highlights huge underlying strains in the economy. But for the central bank, the focus is on supporting growth. And lower CPI inflation gives it room for manoeuvre.’

World Gold Council warns of stagflation

The World Gold Council released a fantastic report this week. Here, they examine how stagflation events may be more frequent than history says. They go on to highlight gold’s position as a defensive asset during turbulent periods:

‘A return to a more powerful stagflation may bode well for gold based on an analysis of history – where it has been the best performing major asset on data back to Q2 1973.

‘In addition, if the market is now expecting a reflation to resurface, after a brief stagflation, then gold might not be the most favoured among the commodity complex. But our analysis suggests the historical likelihood of this is quite low.

‘Furthermore, we also note that going forward, bonds are unlikely to offer the same protection to a shock to risk assets, constrained by the zero-lower-bound. This offers gold an opportunity to command some of those defensive flows, should a shock to risk assets materialise.’

Gold compared to world money supply

Today we take a step back and look at the ‘big picture’ from MKS PAMP (below).

  • The value of all gold ever mined is around US$11 trillion dollars
  • Of that, 47% is in jewellery, 22% in private investment and 17% rests with  central banks.
  • The value of the four major central banks balance sheets (Federal Reserve Bank, Bank of Japan, European Central Bank and Bank of England) is now US$26 trillion. That is more than double the value of all the gold ever mined.
  • The global broad money supply sits at US$90 trillion.
  • Global debt is estimated to be US$290 trillion, a whopping 360% of global GDP (growth domestic product). This is a12% — or US$30 trillion — increase since 2019

 

 

Inside our office this week

Is my unboxing better than yours? Sadly it’s not me personally, rather the team in the Sydney office have this mammoth order of bullion to unbox and prepare for clients!

Consider this your exclusive sneak peek.

Yes, you are looking at a PILE of bullion, measuring about a metre high and 1.3 metres wide! It’s enormous and terribly exciting.

Everything in these boxes will be available for sale next week. My favourite? The brand new ABC Bullion Gold Combi bar…  

Before you go…

Today, Nick Frappell discusses data that suggests US inflation isn’t as transitory as it seems and gold may have some price support, though he notes managed money still seems reluctant to get excited about the precious metal. Plus, Nick covers the bumpy ride ahead for silver bulls and the slow ‘paths of propagation’ from Evergrande are starting to reveal themselves.

Until next time,

Shae Russell
Group Communications Manager, 
For ABC Bullion