Inflation Jeopardises Recovery
By ABC Bullion
Higher rates and more sanctions push gold up
Friday 25 March 2022
In this week’s market report:
- Higher rates, more sanctions push gold up
- High inflation jeopardises recovery
- When will the RBA hike rates
- Tequila Crisis 2.0
- Inside the office this week…
US dollar gold price [XAUUSD] Daily chart
Gold rises: Spot gold rose this week, up 0.81% to US$1,958 per ounce. Au has appeared to find support around US$1,920.
Higher rates, more sanctions push gold up: The Atlanta Federal Reserve Bank president, Raphael Bostic, said he was open to a more aggressive tightening, while acknowledging that six rate increases (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-h/) were likely for this year.
- Overnight, the UK announced sanctions (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-k/) on 65 Russian groups or individuals, while announcing plans to send an additional 6,000 missiles to Ukraine.
- And not to be outdone Australia’s DFAT sanctioned key Belarusians (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-u/)
- The current conflict and sanctions continue to push commodity prices. As noted here (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-o/), any further sanctions on Russian oil and gas will increase energy prices, but gold will benefit.
Away from the US dollar and to gold: Nicky Shiels, head of metals strategy at MKS PAMP (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-b/) Group, noted that increasing Western sanctions on Russia may drive other countries to avoid the US dollar (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-n/), writing:
‘Depending on whether the West is successful or not, the more they are used or, the longer sanctions are imposed, the more other countries will try to avoid relying on Western finance.
‘There are current alternatives, but none currently match the US$ in size, depth and respect…[gold] can be monetized and sold off-market (bearish) or ramped up in order to further de-dollarize (bullish) in an effort to reduce reliance on the US$ and thus the Western banking system.’
Minimal movements across precious metals this week: After some turbulent trading the past few weeks, there was little movement from the other three precious metals.
- Silver (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-p/) is up by 0.79% to US$25.57
- Platinum (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-x/) was unreactive this week, up 0.24% to US$1,032
- Palladium (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-m/) was 0.70% higher this week, a negligible US$17 per ounce move up to US$2,532
High inflation jeopardises recovery: On Monday, Federal Reserve Chairman Jerome Powell said inflation in the US risks the economic recovery (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-c/), saying ‘The labor market is very strong, and inflation is much too high,’ and later adding:
‘We will take the necessary steps to ensure a return to price stability…In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.’
Fed will raise until inflation eases: Powell has made it clear that the Fed plans to increase until inflation is under control.
- The consumer price index (CPI) sits at 7.9%, though the gauge the Fed watches most is at 5.2%. Both are significantly above the Fed’s 2% target rate.
- In addition to aggressive rate increases, the Fed remains committed to quantitative tightening (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-q/) — tipped to begin in May this year — which may amplify any move up in interest rates from the Fed.
- Those with long memories may recall the ‘Tequila Crisis’ of 1994 (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-a/), where rapid and aggressive rate increases from the Fed contributed to the collapse of the Mexican peso. More below.
Bulls, keep looking up: There’s room for Au to stretch its legs and reach US$1,987 again in the short term. The overall trend is up.
Bears, big dips unlikely this coming week: The past seven days have seen gold find support in the US$1,920s. There may be a fall to US$1,930 or even US$1,921, but we are unlikely to see any big dips.
Australian dollar jumps higher, softening the Australian gold price: The Australian dollar jumped 1.85% higher this week to 75.21 US cents. The sharp move higher in our local currency has softened any spot gold gains this week, with the Australian dollar gold price down only 0.95% to AU$2,608 per ounce at the time of writing.
When will the RBA hike rates?
As the Federal Reserve Bank continues with their rate hikes, pressure is mounting on the Reserve Bank of Australia to follow suit and begin lifting rates from the emergency level of 0.10%. While an increase from the RBA is plausible (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-z/), economists at Australia’s major banks vary. CBA says June, ANZ expects the first increase in September, and both NAB and Westpac suggest August (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-yd/), with the latter’s rates strategist Jessica Ren saying ‘We still think June is too early. The RBA’s rhetoric about being patient has not changed despite the Fed and other central banks.’
No ‘inflation psychology’ suggests RBA: The RBA appears to be on the lookout for inflation psychology, writes The Conversation:
‘What’s missing is inflation psychology… It’s a view Reserve Bank Governor Philip Lowe seems to endorse. He said this month that what he is on the lookout for is “inflation psychology (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-yh/)” — the view that price rises will lead to wage rises, which will lead to price rises in an upward spiral.’
Read the whole article here (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-yk/).
Tequila Crisis 2.0
Energy analyst John Kemp (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-yu/) drew parallels between the Fed’s proposed number of rate increases this year and the Mexican peso’s devaluation in 1994, writing:
‘The Fed’s aggressive rate rises in 1994 helped create a government debt funding crisis in Mexico forcing a devaluation of the peso at the end of the year (the “tequila crisis”). The U.S. central bank was caught unaware (see Fed’ minutes from an emergency conference call (https://pallion.cmail19.com/t/i-l-ckihujy-jkstjuudy-jl/) held on Dec. 30, 1994).
‘Rapid interest rate rises in the United States tend to induce extreme stress in the more peripheral and obscure parts of the international system. In 1994, it was the Mexican government’s increasingly heavy reliance on funding its operations with short-duration dollar-linked bills known as “tesobonos” that had to be constantly rolled forward. The causes of the peso crisis was my first semi-serious piece of research when I had to write a 15,000-word thesis on it for my university finals in 1996.’