The gold market seems poised and ready for a potential breakout, but we just need enough momentum to get through USD$1,850 in the next few weeks to confirm. US inflation remains a persistent problem for the Federal Reserve and the gold market is beginning to doubt the Fed’s ability to control it. The CPI numbers released on Wednesday this week saw US CPI remain elevated at a much higher level than the Fed’s target, coming in at 7% year on year. Gold and silver reacted positively to the number, whilst the US Dollar Index dropped through trendline support to 94.80. Without a bounce and quick recovery above this key trendline we may see the USD index begin a new downward trend in the near term.
The December CPI print is the highest annual increase in nearly 40 years. We have talked about inflation a lot in the past year, as the commentary coming out of the Federal Reserve seemed to go against logic. It started with Janet Yellen and then moved on to Powell, but now it seems the ‘transitory’ word has been deleted from the Fed’s dictionary. In Powell’s latest speech, inflation is no longer a ‘blip’ or a ‘transitory’ phenomenon, but has somehow morphed into a ‘severe threat’.
It makes sense for inflation to persist. It is almost always a monetary phenomenon brought about by a rapid expansion in the money supply. The inflation we see today and into the future is a direct result of the monetary expansion seen by all central banks in response to the initial covid pandemic. It is true that supply chain issues and other pandemic-related factors have pushed certain prices higher, but the long-term foundation that allows for inflation to run persistently high for years is the rapid monetary expansion which started in 2020. Increasing the money supply by 20% in one year was never going to have a transitory impact, or a blip higher in inflation like we were told. The Fed was dead wrong on inflation for over a year, and only now Janet Yellen has finally decided to ‘retire’ the transitory word.
The miscalculation of inflation is yet another failure of Fed forecasting you can add to the list; alongside GDP forecasts, dot plots and the ‘soft landing’ in the US housing prediction of Bernanke in 07. Why inflation is such a problem is that it forces central banks to take monetary policy decisions that they otherwise would not.
Monetary policy in a nut shell is supposed to be used to stimulate an economy that is slowing, and then to be contractionary when the economy is pumping on all cylinders again. But if you have a weak economy, that is not strong enough to handle higher interest rates, and inflation rears its ugly head, you have a central bank that is forced to tighten into an economy that cannot handle tighter monetary policy. The US does not have a booming economy, it has a booming stock market, and the two are not the same. The Fed will be forced to raise rates into the biggest debt pile in history and the highest (most bubbly) stock market in history. It must know that no good will come of it, but there are no other tools in the Fed’s arsenal to combat inflation when it spirals out of control.
Omicron ‘Worse than Lockdowns’
Is the current environment even worse than lockdowns? Sydney seems like a ghost town despite the city technically not being in a ‘lockdown’. Many business owners are saying that the current environment is even more damaging than the initial lockdowns we experienced last year. The much higher case numbers are leading to a greater number of Sydney siders having to self-isolate and we are seeing a reluctance of the general population to be out and about ‘living with the virus’. What we see as a result is a massive downturn for many small businesses. Restaurant owners are claiming this period to be worse on several levels, given that they don’t have the same stimulus support as they did during the first waves of covid.
It is apparently no better in Melbourne with consumer confidence plummeting and staff shortages continuing to be a problem. On Chapel Street, 35% of people employed by 2,200 businesses either have or have had Covid, local business group Chapel Street Precinct estimated. With the hospitality sector being most at risk for staff contracting covid and being forced into isolation, it seems this sector of the economy is currently struggling the most. Many would-be customers are choosing to stay indoors and at home in somewhat of a ‘self-imposed lockdown’.
ANZ Bank data seems to back up their claims with statistics showing a sharp drop in consumer spending in Sydney and Melbourne, which matches the lows seen during previous lockdowns.
It seems quite evident that we are currently experiencing an economic crisis of sorts, yet the Australian property market was in melt up mode last year, rising by an average of 22%. The property market is not a good reflection of the underlying strength or weakness in the economy, but rather seems to be in a state of temporary euphoria due to fear of missing out and ultra-low interest rates. The latest quarterly GDP figure released in December saw the Australian economy contracting by –1.9%. Clearance rates have dropped to 58% in Sydney, down from 75% last year. The signs of a slowing property market for 2022-23 are there already, all whilst the RBA is yet to lift a finger on the cash rate. With luck, we might see property prices put in another slightly positive year this year, but with plans for the RBA to start hiking rates in the not-too-distant future, there will be a big test for those Australians with significant mortgage debt. Australian household debt to GDP ratio remains the second highest in the world according to the IMF.
What we are hearing from the small business hospitality sector should be taken very seriously, as these businesses can’t simply close temporarily and may be forced to close doors on a permanent basis. The global economy would likely be in a similar setting, with many small businesses praying for this wave of omicron to be the last. If we see any further mutations in the virus to a more deadly variant (less likely, but possible) we could see further restrictions or lockdowns be the final nail in the coffin for many businesses barely hanging on.
The global economy does not look like it is in a position where it could comfortably handle higher interest rates, but Central Banks are set to start tightening regardless and inflation will be a major force behind their decisions in 2022.
Guardian Vaults Sydney
If you have any feedback or questions about this report, you can contact John Feeney direct at firstname.lastname@example.org
Or on Twitter @JohnFeeney10
Disclaimers: Guardian Gold, Registered Office, Scottish House, 100 William Street, Melbourne, Victoria, 3000. ACN 138618176 (“Guardian Vaults” & “Guardian Gold”) All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher and/or the author. Information contained herein is believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal situation. Guardian Gold, its officers, agents, representatives and employees do not hold an Australian Financial Services License (AFSL), are not an authorised representative of an AFSL and otherwise are not qualified to provide you with advice of any kind in relation to financial products. If you require advice about a financial product, you should contact a properly licensed or authorised financial advisor. The information is indicative and general in nature only and is prepared for information purposes only and does not purport to contain all matters relevant to any particular investment. Subject to any terms implied by law and which cannot be excluded, Guardian Gold, shall not be liable for any errors, omissions, defects or misrepresentations (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (direct or indirect) suffered by persons who use or rely on such information. The opinions expressed herein are those of the publisher and/or the author and may not be representative of the opinions of Guardian Gold, its officers, agents, representatives and employees. Such information does not take into account the particular circumstances, investment objectives and needs for investment of any person, or purport to be comprehensive or constitute investment or financial product advice and should not be relied upon as such. Past performance is not indicative of future results. Due to various factors, including changing market conditions and/or laws the content may no longer be reflective of current opinions or positions. You should seek professional advice before you decide to invest or consider any action based on the information provided. If you do not agree with any of the above disclaimers, you should immediately cease viewing or making use of any of the information provided.