Happy Friday, traders. Welcome to our weekly market wrap, where we take a look back at these last five trading days with a focus on the market news, economic data and headlines that had the most impact on gold prices—and may continue to into the future—as well as the charts for silver, the US Dollar and other key correlated assets.
Gold prices are closing out the week at an extremely high premium to Sunday evening’s opening bids, having been driven higher as investors rush into the yellow metal and other traditional safe havens against expected inflation, following a shockingly high CPI number.
So, what kind of week has it been?
When we said in Monday’s preview piece that the CPI inflation data for October was, after last week’s FOMC meeting, would be less likely to have a meaningful impact on the price of gold, that accounted only for the more probable scenarios in which the reported numbers did not stray beyond touching distance of the consensus estimates. Any quick glance at this week’s gold chart will tell you that that projection was a bit too narrow: An eye-wateringly hot headline inflation number (+6.2% YoY) set a 30-year high and spurred an immediate rally in gold prices that eclipsed the yellow metal’s top-ticks of the last several weeks before taking gold to 5-month highs and beyond.
The tailwind for gold was an aggressive shift that saw investor appetite swing into a full-on rush toward inflation hedges. This view is reinforced by the fact that two assets that have recently held strong sway over gold prices, the US Dollar and US Treasury bonds, moved forcefully in ways that we typically see as bearish for gold; and yet, gold road once of its sharpest rallies of the year. Initially, it looked as if the rise was too volatile, too emotionally driven, to be sustainable as gold prices slid from the tradable high-point around $1862/oz through the rest of the US session on Wednesday. Once overseas markets had their chance to digest the US inflation shock and its possible consequences, however, gold regained its steady lift en route to the sizeable weekly gains that we are seeing to wrap trading on Friday afternoon. Even a brief rally in US Treasury yields in the earliest hours of Friday morning (in part, a rebalancing after US Treasury markets were closed on Thursday) could tame gold’s rally only briefly.
While there are reasonable, objective arguments that could be made to dull the market’s strong reaction to the surge in inflation numbers—the less volatile “core” CPI rose higher than expected, but not to the same degree, most of the categories accounting for the majority of the inflation spike continue to be less tied to persistent, structural inflation (like used autos)—the bottom line is that this CPI report presents several points of data that the Fed and the White House did not want to see; And this is contributing to the volatility of the market’s reaction. The monthly rise in headline inflation was nearly double the expected pace, harshly snapping the recent trend that had the Fed and other economists hopeful that things were cooling; And, while most of the rise in prices between Octobers 2020 and 2021 have been in categories that are expected to calm as we get into 2022, new in this month’s report was a noticeable rise in rent inflation which is typically more suggestive of structural inflation pressures. Most alarming on paper: the spike in annualized inflation is clearly out-stripping the strong gains we’ve seen in wage inflation this year. If this continues, it could pinch the US economy into a feedback loop of rising inflation expectations feeding higher rates of observed inflation.
Despite the aggressive reaction by investors in the Dollar, gold, and Treasuries this week, it seems very premature to say that October’s inflation spike will pressure the bring forward it’s schedule for raising interest rates next year. But it does draw our attention to a narrow path for gold that it will be important to monitor in the weeks and months ahead in any effort to assess or project the yellow metal’s trading values: We’ve seen the specter of overheating inflation drive investors into gold positions and bid the price up to new highs this week; But if this trend in inflation persists or picks up, it will start pressuring earlier action by the Fed, which—it has to be assumed—will be a major limiter on any gold upside.
Next week’s macroeconomic slate is light, with Retail Sales being the biggest draw. But we can expect some public appearances from FOMC officials that will likely be compelled to comment on how this week’s inflation surprise might shift their outlooks.
For now, traders, I hope you can get out and safely enjoy your weekend for the next couple of days. After that, I’ll see everyone back here on Monday for our preview of the week ahead.