Gold bugs are finally celebrating.
Following a three-week bloodbath, the yellow metal jumped higher last week. It’s trading at US$1,231 per ounce this morning.
Emmanuel Macron’s win in the French election sent prices plunging. The euro was bid up, with the greenback selling off.
Uncertainty was off the table…but it lasted less than a week.
US President Donald Trump fired FBI director James Comey, calling him a ‘showboat’. The shock decision triggered plenty of backlash, sparking gold’s rally.
The Democrats aren’t impressed with the decision. Their anger could delay Trump’s economic agenda, especially tax reform. That’s caused a fair bit of uncertainty, which is supporting the higher gold price.
The Democrats have also accused the president of conspiring with Russia over the US election results. Comey wanted more money to look into the incident. And the Democrats have called an independent inquiry into the matter.
Adding to the speculation, Trump tweeted that ‘James Comey better hope that there are no “tapes” of our conversations before he starts leaking to the press!’ on Friday. The tweet sent the mainstream media into a frenzy, pushing gold higher.
What’s more, the firing of another ballistic missile by North Korea also aided gold’s move.
While there’s plenty to talk about, let’s focus on the US Federal Reserve today. Contrary to popular opinion, I believe the Fed won’t raise interest rates next month. If I’m right, gold could bounce to US$1,280 per ounce in the weeks ahead.
The market’s got it wrong
Bloomberg reported on Friday (my emphasis added):
‘Investors and the Federal Reserve may have grown too comfortable with gradualism — raising interest rates at a pace that is not too fast, not too slow, but just right. The outlook could abruptly shift if global growth gains momentum and U.S. unemployment sinks much lower.
‘Markets look complacent. Prices in interest-rate futures show almost a 90 percent probability of a hike in June, according to the CME Group in Chicago. While investors have been moving toward another increase by the end of the year, they’re not entirely convinced, according to Bloomberg calculations. Volatility has also slumped across different classes of financial assets, with a Merrill Lynch index that gauges options prices on Treasuries is near its lowest levels in data going back to 1988.
‘The risk, of course, is that when Fed officials release their statement and updated quarterly forecasts at the end of their June 13–14 policy meeting, they’ll signal a steeper path of rate hikes than the three annual moves that are currently penciled in for 2017 and 2018.’
Bloomberg jumped the gun here.
For a start, it assumes the current interest rate pricing environment is correct. Yet expectations have already changed since the article was published on Friday. According to CME Group’s Fedwatch Tool, there’s now a 73.8% chance of a rate increase next month — down from 90%. I expect that percentage to drop like a rock in the weeks ahead.
Despite numerous bullish opinions, the US economy isn’t as rosy as it seems. Boston Fed President Eric Rosengren disagrees. He’s urging colleagues to raise rates three more times this year. That’s on top of the Fed’s March rate rise.
The Fed is starting to ‘bet big’ on inflation expectations. They believe the labour market is showing signs of growth, which will push inflation higher. That should jump-start consumption and ‘reboot’ the economy.
Bloomberg notes (again my emphasis added):
‘Economists, however, admit that they don’t understand inflation dynamics very well, and the committee is wagering that public expectations are strongly anchored around 2 percent. Yet inflation expectations are also influenced by central bank actions.’
These ‘academics’ have seemingly no idea about what impacts inflation, yet they are in control of the world economy. It’s a joke. To think, central banks have engaged in the biggest financial experiment of all time — money printing.
Globally, central banks have printed around US$14 trillion out of thin air. And it hasn’t caused one inch of inflation. That’s because people are suffering from recession-type conditions. The Fed’s economic models are antiquated. They incorrectly project that ‘everything’s great’.
Price inflation is coming back…but not anytime soon
Here’s some free advice to Fed Chair Janet Yellen…
US inflation has mostly been influenced by higher crude oil prices and rising healthcare costs.
Crude oil has averaged around the US$50-per-barrel level this year. That’s not great for the consumer. See, most people have been hit by falling hourly wages since 2006:
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Yet, despite less money in their pocket, people still need to buy fuel for their cars. That’s kept inflation elevated. Of course, there are inflation indicators that ignore fuel costs. Nevertheless, crude oil prices are worth following as an inflation indicator.
As I’ve analysed for you over the past few weeks, oil prices are due for lower lows in the months ahead. The world is swimming in crude. And falling crude prices should help ease the household budget. That should reduce inflation expectations in the future.
Healthcare costs have also become a major component of inflation. The costs aren’t subtracted from any inflation data. US health spending per capita (including public and private spending) is higher than it is anywhere else in the world. Yet the country lags many first world nations in several aspects, such as life expectancy and health-insurance coverage.
Most US citizens have seen their costs at least double under Obamacare. The failed system has become too expensive; people just aren’t buying healthcare anymore.
No wonder Donald Trump wants to abolish it. His latest American Health Care Act should cut these taxes by over US$1 trillion. That’s likely to dampen inflation forecasts. Remember, these taxes have propped up the data for years.
With disposable income feeling the pinch, the latest University of Michigan data reveals something shocking. The medium-term inflation expectations are the weakest on record:
Source: University of Michigan
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Janet Yellen, why are you turning a blind eye to the real data?
The US core consumer price index jumped 1.9% year-on-year in April. That’s the lowest gain since October 2015. If crude prices fall in the weeks ahead, I believe the Fed could easily backflip on raising rates in June. There are more reasons, which I’ll explain tomorrow. But diving into the data, I doubt the US Fed’s going to raise rates next month.
The bottom line: Gold looks like an attractive short-term trade at the moment. The market believes the Fed will raise rates. However, if we start to see more weak economic data, that expectation could quickly change.
Editor, Markets & Money
PS: My colleague Vern Gowdie is no fan of central banks…to say the least. Vern believes their reckless monetary experiment will end in disaster. One that will eventually crash global stock markets by 70–80%. Vern’s so concerned he wrote a book detailing just how the world got into this mess. And specifically what we Aussies can do today to protect ourselves from the coming fallout. Find out how to get your copy here.