Inflation climbs higher, but gold closes sharply lower

The inflationary rate, according to the PCE (Personal Consumption Expenditures Price Index), the preferred inflationary index that the Federal Reserve uses, rose sharply to a 13 year high in June. However, it came in under analyst expectations and forecasts, which was one factor that took gold prices lower on the last trading day of July 2021.

The PCE price index rose 0.5% in June, taking the year-over-year inflation rate to 4%, according to the United States Bureau of Economic Analysis (BEA). It took four concurrent monthly sizeable upticks in inflation to get to 4% over the past 12 months. The last time the PCE price index was at this level was in 2008.

The Federal Reserve’s target has been to maintain an inflationary rate of approximately 2%. This year the Fed adjusted its mandate to focus on maximum employment and let inflation run hot. But the fact that inflation based on the CPI is at 5.4%, and now the PCE price index, which strips out food costs in energy, is double the Federal Reserve’s target, it must be running hotter than the Fed expected.

During the press conference held by Chairman Powell this week, he acknowledged that inflation had risen much faster this year than he and other senior Federal Reserve members predicted. He also acknowledged that it is possible that inflation “could turn out to be higher and more persistent than we expected.”

The Fed continues to maintain that the current inflationary rate is transitory because rising prices are almost entirely the result of the reopening of the U.S. economy. He blames much of the inflationary pressure on supply chain bottlenecks saying, “Supply bottlenecks have been larger than anticipated.” He also added that “Once these bottlenecks abate and the economy returns to normal, prices are likely to recede.”

While some analysts agree with the Federal Reserve’s assumption that inflation is, for the large part, a transitory scenario, many analysts believe that the current uptick in inflation is not all transitory, citing recent dramatic rises in food cost and energy.

Regardless of the statements by Chairman Powell, inflation, even using their preferred index, which strips out food and energy costs, is at a dramatic and alarming high. More importantly, the Fed is assuming that inflation will likely slip back to a number closer to the Federal Reserve’s 2% target next year. If they are wrong, the implications would be alarming.

As of 5:51 PM EST gold futures basis, the most active December 2021 Comex contract is currently down $18.90 and fixed at $1816.90. On a technical basis, we saw resistance enter the market as gold broke through its 200-day moving average yesterday but stalled just below the 50-day moving average. Today gold prices opened just above the 50-day moving average at $1831.10, opening at $1832.50. Therefore, the 50-day moving average is a critical price point that must be breached on a closing basis next week if we are to see the strong price increases witnessed yesterday for the rally to continue next week.

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