The message that inflation has not been defeated and the world is in for more instability could not be any clearer than the signal that gold sent last week.
The Federal Reserve as we have rehashed in these pages elected to attempt to get ahead of a recession which has already probably started months ago, by cutting the Fed Funds and Discount Rate last week, yet a nagging lagging indicator seems to present great risk to the Fed narrative.
The chart above is one of the Fed’s quiet markers for PCE trend published by the Federal Reserve Bank of New York.
As it indicates, while the favorite measure of inflation for the Federal Reserve, Personal Consumption Expenditures (PCE), while lower from it’s 2022 peak, is still above target and appears to be adopting a relationship more akin to the modeling at the Atlanta Fed which projects a higher “Sticky CPI” indicating inflation remains above the Fed’s official target for longer.
The model for how the Fed under or over reacts to inflation and economic uncertainty, at least based on recent behavior and modeling, is unfortunately the Great Financial Crisis. During that era, the Fed refused to enforce their regulatory oversight, denied a recession was beginning in late 2007, and though that inflation was a problem relegated to the late 1970’s and not the modern era.
Gold passed judgement on the Fed by starting to warn markets in 2006 that indeed there were issues with the financial system, the dollar, and of course the greater economy. The chart below highlighting the move from 2006 to 2010, the meat so to speak of the Great Financial Crisis, provides the markers for how the ultimate monetary metal warned everyone things are not what they seem.
Gold knows, it always knows.
A quick review of the same chart from 2020 through this past Friday’s close also sends a similar warning.
The difference between 2007 and this past nine months is that the gold bulls have sniffed out the crux of the crisis; that the Fed has absolutely zero clue how to handle sticky inflation above target, a slowing economy, and US fiscal irresponsibility unseen since the likes of the Peronists reign in Argentina.
The recent market activity first indicated a minor correction might occur with the intraday reversal during the circus like Fed day this past Wednesday.
Instead of rolling over and consolidating again, the fear and realization that the Jay Powell press conference indicated that he was attempting to obfuscate the obvious indecision and inability to deal with the threat of a stagflationary recession in addition to global plus domestic political instability was reason enough to move into the safety trading instruments.
The safety trades being precious metals, short term (2 years and under) Treasuries and corporate bonds, while de-risking from questionable assets for now.
If one does a quick back of the napkin analysis of gold, the potential for a rise to the $3198 to $3230 range in very short order is possible in the next 90 to 120 days.
Keep your powder dry and remember, gold knows.
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Gold shines a spotlight on the disastrous fiscal policies of the criminals in power. They don't like spotlights. Expect them to move again gold eventually, like FDR did.