Gold has modest gains, with current price right at resistance

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Gold futures basis the most active February 2022 contract had modest gains today and as of 5:25 PM EST is currently fixed at $1784.90. Gold traded to a high of $1789.30, and a low of $1772.40. The current price matches precisely with a technical level we have identified using a Fibonacci retracement.

The retracement set the used begins on November 3, the conclusion of last month’s FOMC meeting when gold traded to a low of $1758. The retracement set concludes at the highs achieved on November 16 when gold futures traded as high as $1879. The current price of gold precisely matches the 78% retracement level of the two-week rally just mentioned. Gold traded to a low of $1763 on Thursday of last week and has slowly recovered from that price point.

On Friday of this week the government will release the CPI (Consumer Price Index) inflation index numbers for November. Although the Federal Reserve prefers to use the PCE inflation index because it omits both food and energy costs, the CPI is a much more realistic indication of real inflationary pressures faced by Americans as they purchase needed goods and services. The CPI index for October came in at 6.2%. This was the highest level of inflation recorded since November 1990. The surge in inflation as seen in the October CPI was well above forecast by economists who predicted that October’s inflation level would only be 5.8%.

Forecasts for the upcoming CPI inflation report are anticipating that November will exceed the inflationary numbers of October and could top 7%. If in fact this does occur it will be the first-time inflation has run this high since 1984.

Even if the actual numbers are anywhere around 6% the Federal Reserve is forced to walk a tight rope, a balancing act that will be difficult, if at all possible, to go from one end of the wire to the other. While the go to method in the Federal Reserve’s toolbox to temper or lesson inflationary pressures is to raise interest rates. While raising rates are certainly an effective tool, it can also contain an extremely damaging effect because it inherently will slow down the economic growth and recovery which is currently occurring. If they tighten to quickly, they could wreak havoc on the United States economic recovery from the recession which resulted from the pandemic of 2020.

Bloomberg’s distinctly expressed the dilemma by saying, “Yhus the market remains convinced that if the Fed wants to squelch inflation, it can. The question is whether that confidence is justified, and to answer it we need to know what has been driving inflation so far.”

Chairman Powell in his recent testimony to the Senate Banking Committee acknowledged in a very roundabout way that the Federal Reserve is recognizing that inflation pressures are much more persistent than they led the American public to believe. He came short of stating that the Federal Reserve got it wrong, and blamed individuals’ interpretation of the word transitory as his rationale to retire the word “transitory” in regards to how the Federal Reserve was labeling inflationary pressures. By saying we will retire the word because “the word transitory means different things to different people”, he fell short of acknowledging that there have been extraordinary inflationary pressures either unrecognized or simply denied by the Federal Reserve.

Now the Federal Reserve must balance the necessary steps to curtail inflation without creating an economic train wreck if handled incorrectly. As I’ve said on many occasions there is no strategy that will reduce inflationary pressures and not have a detrimental effect on the economic recovery. While the Federal Reserve has pledged to have absolute transparency they absolutely failed when it comes to the current inflationary pressures. Either they were naïve and blind to the spiraling level of inflation, or not forthcoming or transparent to the American public by continuing a false narrative that the inflationary pressures would subside quickly.

If the current forecast for November’s CPI data does come in at 7% the Federal Reserve will have an almost unattainable challenge to normalize inflationary pressures and maintain economic growth and recovery.

Wishing you, as always, good trading and good health,

Gary S. Wagner - Executive Producer