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