This week, gold rose 4.62%, copper 5.65%, platinum 2.04%, and silver 10.02%. WTIC oil rose 4.66%.
These are not annual returns. They’re for one week.
The S&P GSCI, a broad index of commodities, last bottomed on December 12, the day before the final FOMC announcement of 2023, and after which Jay Powell first endorsed speculation about cuts to the Fed funds target rate. Since then the index has risen 15.69%. Gold is up 17.29% over the same period.
Raw materials have now validated the inflation that has already been obvious in stock prices and which Financology has been warning of since that FOMC announcement. And while the financial media at large have been utterly obsessed with speculation about Fed rate cuts, allowing nary a minute to pass without reminding viewers and readers that the only question at bar is when and how fast interest rates will fall, the bond market has been quietly hiking rates since December 27, unremarked by virtually all financial media outside of Financology.
Either the financial media or the bond market is dead wrong. And I don’t think it’s the bond market.
Gold prices reflect this dollar depreciation, but I’m citing the above data to show that gold is hardly alone. It’s only slightly outperformed the S&P GSCI since December 12. That should come as less than shocking considering that the one thing they all have in common is merely the fact that we’re citing their prices in the same currency units, the securities issued by the United States Federal Reserve, Federal Reserve Notes or United States Dollars.
In other words, what’s going on with gold isn’t so much about gold as it is about the securities we’re pricing it in.
The decline in purchasing power of these securities, first evident in stock prices, and now in red hot commodity prices, has already begun to filter into and be reflected in the notoriously slow indexes of US domestic goods and services prices cited and followed by government and Wall Street economists. Even while some Federal Reserve officials are beginning to question the rate cut mantra, others remain in denial, dismissing these first tenuous lifts in lagging indicators as possible mere “bumps on the road” to the promised land of 2% inflation utopia.
So far this time, however, the word “transitory” is conspicuous by its absence.
Thanks Bill. As usual, I’ve nothing smart to contribute but I sincerely appreciate your thoughts here re: gold and commodities in general.
“In other words, what’s going on with gold isn’t so much about gold as it is about the securities we’re pricing it in.”
That the fiat dollar is a ‘rubber ruler’ has been the main premise underlying your work for as long as I’ve known you. It’s never been more true than now. You know that old line about the light at the end of the tunnel being an oncoming train? Maybe it’s just me, but it feels like that train’s getting awfully close, awfully fast.
If rates stay high, the government will have to print more dollars to pay the interest on the debt along with its other obligations. That’s inflationary and gold goes up as measured in dollars.
If rates are cut, that’s also inflationary and gold goes up as measured in dollars.
Either way, gold, commodities, and equities rise in depreciated dollars. As you’ve pointed out elsewhere, gov’t spenders have no inclination to even tap on the breaks but instead keep spending like mad.
How long do you see inflation like this continuing, and how do you see it ending?
Thanks, Shiny! Odd … I had just checked in to comment about a Bloomberg blurb on today’s “Daybreak Australia”. The report marveled at the rising price of gold, characterizing it as “confusing”, citing unnamed analysts as struggling to get to the root of it.
You just summed it up neatly. Bloomberg should give you a ring.
Where do we go from here? In the short run, I don’t know. Gold is technically overbought. But so is the rest of the commodity complex. The main near term risk could materialize in as little as the next 24-48 hours, with the release of PPI and CPI. As I said in my post, big inflation headlines counterintuitively tend to depress gold prices. They raise the chances of a policy response. Gold does its best before inflation is making headlines.
The rocket fuel that has been driving the whole commodity complex was the Fed’s Big Pivot on December 13. Powell threw gasoline on the fading embers of inflation and has been fanning the flames since with incessant talk of rate cuts, amplified and sustained in the media echo chamber. Another hot official inflation report might be enough to finally inspire a toss of cold water.
But that would only bring a breather. The big driver is the juggernaut of explosive fiscal incontinence.
Bear in mind that idea behind raising rates to quell inflation is to make borrowing more expensive so you get less of it. Washington has been a notoriously price-insensitive borrower. At least in one direction … last decade’s easy money, which went nuclear in 2020, made it easy to borrow and spend more. Trouble is it’s really hard to reverse, even when it’s an existential threat.
This means the all the belt tightening has to fall on the private sector. Sectors like housing have been impacted, but overall the response has been underwhelming. So money and debt continue to grow and the dollar and bonds continue to shrink.
But picture what happens when it starts to pinch. Unemployment begins to rise. Stock prices fall. Calls for monetary and fiscal stimulus begin to mount. This starts the next leg down for the dollar … and the next leg up for gold.
I don’t know what finally ends the cycle. In a sane world, the government would at least start to get a grip on spending. The current regime seems hell bent on going even deeper, and the opposition isn’t exactly a paragon of fiscal rectitude. Wars and rumors of wars don’t augur well for restraint either. In the 1970s public pressure finally brought action. It has been growing, but isn’t there yet.
It’s possible that that pinch develops into another deflationary crisis a la 2008. It’s also possible inflation just keeps going until an intractable debt and currency crisis forces a fundamental restructuring or revolution. We’ll have to keep watch for signs as the process unfolds.
What do we know? There will be no soft landing. There is no getting consumer price inflation down without going through asset prices first.
“The main near term risk could materialize in as little as the next 24-48 hours, with the release of PPI and CPI. As I said in my post, big inflation headlines counterintuitively tend to depress gold prices. They raise the chances of a policy response. Gold does its best before inflation is making headlines.”
What we’re seeing this morning is just what I had in mind. A hot CPI release has slammed gold prices. The silver lining is that they’ve been slammed less than stocks, bonds, and most other metals, indicating underlying strength.
Gold continues to exceed expectations. Even after its post-CPI trashing it’s getting back on its feet.
It’s still only marginally exceptional though, not dramatically outperforming copper, silver or platinum in recent days. Nor even oil or cocoa or coffee. Indicating it’s still largely a dollar story.
This is worth mentioning in light of widely published analysis chalking up its exceptional run to central bank buying. As far as I know, central banks aren’t accumulating copper reserves. The central bank attribution is valid, but not the fundamental explanation it’s cracked up to be.
It also indicates the strong dollar story is really one of weak competition. Yen is plays a starring role, but has a big supporting cast. The world’s currencies are collectively spiraling down the porcelain receptacle.
Here’s a chart to illustrate the above. It’s a one-year chart of gold in terms of copper. Gold has modestly outperformed over the last year, likely due to a combination of central bank accumulation and marginal use of gold as a surrogate for increasingly dicey Treasuries.
But there is no monster rally justifying the 2024 hysterics about a gold mania. That only appears in charts of gold as priced in fiat. In copper terms, gold is actually cheaper today than it was in October. The big story is in plunging fiat, aka inflation.
A five year chart also shows copper-denominated gold cheaper than it was in 2020. Go to StockCharts.com and input $GOLD:$COPPER.
Some years ago, maybe 10 or more years, I noticed that Singapore was following EJ’s GAGFO (good as gold for oil) hypothesis. I strongly suspect that a lot of emerging market Asian countries’ (this essentially means ex-Japan and I have no idea of what Japan and its people are doing) central banks are buying gold and it almost goes without saying that the people of those Asian countries are buying gold.
The thing is, those emerging market Asian countries’ populations have a living memory (they either experienced it or have a parent or grandparent who experienced it) of either a hyperinflation or a very nasty currency devaluation. I believe this is one of the reasons why so many Asians believe that “real estate always goes up.” It’s because they live in countries with historically lousy currencies.
It is indeed a paper money problem and every country on the planet has a fiat currency. The so-called dollar strength measure has always been an obvious joke. I’m sure the U.S. dollar index is off the charts when compared against a Zimbabwe dollar, a Turkish lira, or an Argentinian peso. The relative strength of the dollar is, as you say, an indicator that its comparable currencies are even lousier.
As I type this, the spot gold price has broken $2,400 per troy ounce. We’re only $100 away from what EJ publicly said in the 2000s what the price would hit and he indicated that the real number he had in mind was something he couldn’t say without being labelled a crackpot.
The galloping gold price really troubles me. The Federal Reserve seems to have taken on a third mandate to not let asset bubbles it created pop and we are now starting to see even hated assets levitate.
It feels like the foundations have shifted just over the past couple weeks. How much is really fundamental is less clear.
Inflation didn’t just emerge despite the CPI and other government stats. If you step back and take a bigger view, what’s been happening is a rolling inflation. First you see it in stock prices, then commodity prices, then stock prices, commodity prices, etc. The change is in perception. As long as it’s in stock prices, economists and the public don’t recognize it as inflation. When it moves to commodities … all of a sudden … there it is. But it’s been there all along. The dollar’s loss of purchasing power rolls around but is still there most of the time.
A victory lap on my call for an interim $2400 ceiling on gold would probably be premature, but at the moment it appears to have some merit.