Posted in: Market News
Published:
December 11, 2019 10:08 PM UTC

Gold Price Regains Its Shine as Federal Reserve Calls for More Inflation!

Gold's price rallied on Wednesday amid signs underlying inflation was continuing to outpace real interest rates.

  • Gold hits $1,478.60/oz on Wednesday, a new six-day high.
  • U.S. underlying inflation picked up faster than expected in November.
  • Gold remains in a primary bull market so long as real interest rates undershoot cost pressures.

The price of gold rallied on Wednesday after two measures of inflation rose faster than expected in November, offering another value driver for the precious metal.

Bullion Rallies; Silver Follows

Demand for precious metals firmed on Wednesday as stocks drifted between narrow gains and losses. Gold for February settlement rallied $10.50, or 0.7%, to $1,478.60 a troy ounce on the Comex division of the New York Mercantile Exchange. It was bullion’s highest level in about six days.

Gold is regaining its shine on Wednesday as the futures price approaching $1,480/oz. | Chart: barchart.com

The value of silver futures rose 16 cents, or 0.9%, to $16.85 a troy ounce.

Gold’s premium over the grey metal fell 0.6% to 87.32 ounces.

Metals have stabilized this week after experiencing a sudden flash crash on Friday. Gold wiped out an entire week’s worth of gains after impressive U.S. jobs numbers triggered a 300-point rally in the Dow Jones Industrial Average.

Inflation Rises

Bullion’s overnight rally intensified early morning after the Labor Department reported a bigger than expected rise in inflation.

The consumer price index (CPI), a widely followed measure of inflation, rose 0.3% in November and 2.1% annually, official data showed. Annual CPI was 1.8% in October.

The Labor Department’s inflation numbers suggest cost pressures are rising. The Fed seems to disagree. | Image: Department of Labor

So-called core inflation, which strips away volatile goods such as food and energy, increased 0.2% on month and 2.3% year-over-year.

As CCN reported in October, real interest rates – i.e., the difference between nominal rates and inflation – are the primary catalyst behind gold’s bull market. At 2.3% annually, core inflation is trending well above the yield on 10-year U.S. Treasurys. The Treasury yield curve is the first mover of domestic interest rates and plays an instrumental role in setting global interest rates.

The benchmark 10-year Treasury yield fell by about 3 basis points to 1.805% on Wednesday, according to CNBC data.

Federal Reserve Keeps Rates on Hold

The Federal Reserve’s policy board voted to keep interest rates on hold Wednesday, as officials adopted a wait-and-see approach following three aggressive rate cuts between July and October.

Members of the Federal Open Market Committee (FOMC) judged that,

current stance of monetary policy is appropriate to support sustained expansion of economic activity.

The Fed’s policy statement flagged ongoing troubles with tame inflation, which means interest rates need to remain lower for longer. Ironically, the Fed’s policies have been blamed for deflation as lower interest rates allow banks to hoard money more easily. That money doesn’t seem to be flowing into the real economy.

Central bankers gauge inflation using the core personal consumption expenditure (PCE) index, which is almost always below their 2% target.

Officials on Wednesday issued new projections that assume interest rates are low enough to stimulate growth in 2020 and beyond. Under those assumptions, the Fed believes it can keep rates steady throughout 2020 before raising rates once or twice after that.

The Fed’s now infamous ‘dot plot’ summary of interest rate expectations. Remember: This time last year the central bank was expecting higher interest rates in 2019. | Chart: Federal Reserve

The U.S. central bank is notoriously bad at predicting the future. Case in point: This time last year, the Fed had completed its fourth rate hike of 2018 and was looking ahead to more upward adjustments in 2019. The central bank capitulated a month later by walking back guidance on monetary policy before eventually slashing rates in July for the first time since the financial crisis.

This article was edited by Josiah Wilmoth.

Last modified: December 12, 2019 2:26 AM UTC

Sam Bourgi @hsbourgi

Financial Editor of CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi. Sam is based in Ontario, Canada and can be contacted at sam.bourgi@ccn.com