Gold Lagging Inflation

Gold is lagging the raging inflation unleashed by the Fed’s epic money printing. Despite leading inflation benchmarks skyrocketing to multi-decade highs, gold prices have barely budged. Serious inflation initially fuels record-high stock markets, which stunt gold investment demand. But festering inflation increasingly erodes corporate earnings, hitting stock prices. As stock markets roll over, gold will start reflecting this inflation.

Runaway inflation is increasingly plaguing the United States, as evident in this week’s major economic releases. The December Consumer Price Index headline number came in up 7.0% year-over-year, its hottest print since June 1982! That’s a 39.5-year high, despite the CPI being intentionally lowballed by the government to mask inflation. Fast-rising general prices slash standards of living, angering American voters.

This latest CPI report claimed food and shelter costs only climbed 6.3% and 4.1% over this past year. Is that your experience? The actual increases in grocery bills, housing, and rent costs have likely soared at triple-to-quadruple those pretend trajectories. Leading into this latest CPI release, new research from Bank of America reported food, housing, and rent prices have blasted about 27%, 18%, and 12% higher YoY!

Shelter accounts for about a third of the CPI, which is held artificially low through a fiction called owners’ equivalent rent. That is just a survey asking homeowners to guess how much they’d expect to pay to rent a house of similar quality! Most Americans who aren’t real-estate professionals wouldn’t have a clue on that. The CPI is full of similar statistical trickery instead of using honest hard free-market data on prices.

The December Producer Price Index showing wholesale price trends looked even worse, soaring 9.7% YoY! That was a record high in this current PPI iteration. Far more inflation is baked into the pipeline, as an intermediate-demand PPI subindex rocketed up 24.4% YoY! These soaring input costs are cutting into corporate earnings, and will ultimately be passed along to customers driving more price increases.

Government officials are blaming this crazy inflation on supply-chain snarls, which is pure misdirection. As legendary American economist Milton Friedman warned way back in 1963, “Inflation is always and everywhere a monetary phenomenon.”When money supplies are ramped faster than economies’ goods and services, relatively-more money competing for relatively-less things to spend it on bids up their prices.

Central banks directly control money supplies. In the past 22.3 months since March 2020’s pandemic-lockdown stock panic, the Fed has mushroomed its balance sheet an insane 110.8% higher or $4,607b!By directly monetizing $3,187b of US Treasuries and $1,243b of mortgage-backed bonds, the Fed has effectively more than doubled the US-dollar monetary base! Such extreme excess is wildly-unprecedented.

All those trillions of dollars the Fed conjured out of thin air to buy bonds were quickly spent, injecting that vast deluge of new money into the real economy. With monetary growth greatly exceeding underlying economic growth, prices of almost everything are surging to reflect vast oceans of new dollars sloshing around. Except gold’s, history’s premier inflation hedge has largely slept through this money-printing orgy.

When the Fed first redlined its printing presses in that stock panic, gold did surge dramatically powering 40.0% higher over the next 4.6 months. But the huge investment-capital inflows fueling that massive upleg left gold extremely overbought in August 2020, so it has mostly been consolidating sideways ever since. That has created an enormous pennant chart formation on the verge of an imminent forced breakout.

That should spawn a major new bull-market upleg where gold will start reflecting the more-than-doubled US-dollar supply. But for now, gold is really lagging the Fed’s raging inflation. This chart superimposes real inflation-adjusted gold prices over the year-over-year changes in the CPI during this metal’s secular bull. These real gold prices are CPI-calculated, while gold’s gains and losses are shown in nominal terms.

Gold’s current secular bull was born in December 2015, incidentally, the day after the Fed launched its last rate-hike cycle. Since then gold has powered 96.2% higher at best over 4.6 years as of August 2020. That big post-stock-panic upleg catapulted gold to an all-time nominal high of $2,062. But in real inflation-adjusted terms, gold had been much higher the last time inflation was so out-of-control four decades earlier.

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