Tomorrow, the US Bureau of Labor Statistics is to publish inflation data against the CPI index. This report will be an important component that the Federal Reserve will consider before publishing its revised monetary policy. The Federal Reserve is to release a statement Wednesday next week, including a revised dot chart and a press conference by Chairman Jerome Powell.
Bob Haberkorn, senior market strategist at RJO Futures, said: “Higher-than-expected jobless claims figures, coupled with a stronger dollar, are pushing gold prices down, but there are also traders awaiting CPI data. If inflation is high, then gold will bounce back up and approach the $ 1,800 mark. ”
Inflationary pressures have spiraled out of control for months. Inflation picked up in early June when the consumer price index stood at 5.4%. Inflation remained around this level in July, August and September. However, that all changed in October, when the CPI forecasts showed a significant increase to 5.8%. But the actual figures significantly exceeded forecasts and amounted to 6.2%, which was the first manifestation of inflationary pressures at this level since November 1990.
Until October, the Federal Reserve maintained an adjusted mandate to build inflationary pressures instead of maximum employment. They based their assumption on the belief that current inflationary pressures would be temporary and quickly return to acceptable levels.
Chairman Powell recently admitted that this assumption was wrong, removing the word “transitional” from the Fed’s vocabulary. However, his explanation was completely true when he said that we will delete the word temporary because “temporary means different things to different people”.
The report is expected to record a record inflation rate. Market participants as well as the Federal Reserve will keep a close eye on tomorrow’s report. Economists, interviewed by various new sources, are now forecasting even higher inflation, forecasting inflation to rise 0.7% on an annualized basis of 6.8%. If economists are right, this will be a level not seen since the 1980s.
Today’s decline in gold futures was not a reflection of tomorrow’s expected report, but rather based on the strength of the dollar and the report pointing to strong employment data in the United States. As of 5:35 pm ET, the most active February contract is locked at $ 1,775.90, a net decline of $ 9.60.
To better understand why gold could enter a major rally tomorrow if inflation rates are as predicted or higher, we need to look at what caused the record inflation rate in 1980 and what impact it had on the economy. In the early 1980s, countries around the world, including America, experienced one of the worst economic downturns since World War II.
As Wikipedia writes, “The early 1980s recession was a severe economic recession that affected much of the world from about the early 1980s to early 1983. It was believed by many to be the worst recession since World War II. The key event leading to the recession was the 1979 energy crisis. ”
In 1980, inflationary pressures ranged from 12.52% to 14.76%. By January 1982, the CPI had dropped to 8.39%. From 1980 to 1983, it took about three years before inflationary pressures returned to normal. This brings us to our current dilemma: For the Federal Reserve, inflationary pressures will not be effectively reduced overnight and, in fact, could well be a long, multi-year process. Historically, inflationary pressures at current levels are the result of unique geopolitical or economic circumstances. Since there is an underlying force behind inflation reaching these high levels, it is impossible to reverse this trend in a short period.
It is because of these factors that I believe that if tomorrow’s CPI report points to higher inflationary pressures than the previous month, it will become clear that the Federal Reserve is facing a multi-year task of getting inflation back to normal. During this multi-year period, gold may experience one of the most dynamic rallies we have witnessed in our lives, it may even trade to a new record level, based on the time it takes for inflation to normalize.
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