Rising inflation across the globe is a real test of the gold price

(Kitco News) Inflation is one of the biggest risks that could derail the economic recovery this year, especially if central banks get tightened incorrectly, according to analysts.

Rising price pressure is being felt across the globe. In the US, inflation ran at the warmest pace since 1982 in December, rising 7% over the past 12 months. Inflation in the euro area reached a new record high of 5% annually in December.

In the UK, inflation hit 10-year highs, with the consumer price index (CPI) rising 5.1% in the 12 months to November. Spain’s price pressure rose to almost three-decade highs, with annual inflation rising 6.7% in December. In Italy, the cost of living rose to its highest level in more than a decade in December, with the CPI rising 4.2% compared to December 2020.

However, there are signs that global inflation may be close to peaking. In China, for example, price pressure eased in December, which opened the door for the central bank to continue to provide stimulus. The consumer price index rose 1.5% in December against 2.3% in November. China’s producer price index also cooled, rising 10.3% year-on-year, down from 12.9% in November.

In the US, the producer price index also fell, indicating a fall in inflation. The PPI target rose 0.2% in December following the 0.8% rise in November. Data were weaker than expected and economists predicted a 0.4% increase. More specifically, food and energy prices fell, indicating a possible peak in price pressure.

“Investors are looking for signs of moderation in supply chain disruptions, as falling input costs will ultimately signal a easing of consumer price burdens. Recent economic data indicating shorter delivery times in the December ISM Manufacturing report and a easing of China’s factory entry prices have been supportive.” peak load bottlenecks, “said Comerica Wealth Management’s chief investment officer John Lynch.

Recent comments from Federal Reserve Chairman Jerome Powell indicated that the central bank is willing to do anything to control inflation.

As he testified at his nomination hearing this week, Powell said he sees “inflationary pressures on the way to lasting until the middle of this year.” And if inflation becomes more entrenched, the Fed will raise interest rates higher.

So far, the Fed’s normalization policy includes the end of the downturn in March, at least three interest rate hikes and a balance sheet drain in 2022.

Powell also warned that a recession is possible if the Fed is forced to tighten too much. “If inflation becomes too persistent, it will lead to a much tighter monetary policy and it could lead to a recession,” he said.

The Fed, however, seems to leave enough flexibility to adapt and change its mind once the tightening begins.

The Bank of England is already fighting inflation with rate hikes, with the bank pricing price pressures rising to over 6% in 2022. In December, the BoE raised interest rates by 25 basis points and markets expect four more hikes in 2022.

The European Central Bank, meanwhile, remains dove-like, and President Christine Lagarde assures the market that rate hikes will not be considered this year. Recent inflation figures, however, put further pressure on the ECB to act.

Is inflation peaking?

Billionaire “Bond King” Jeffrey Gundlach pointed out that Fed Chairman Powell becomes more hawkish about raising interest rates every time he speaks. Looking at rising wage growth, the Fed seems “pretty far behind in the curve,” explaining its recent hawkish shift, Gundlach said during his webcast Tuesday.

DoubleLine CEO Jeffrey Gundlach said he is now on “recession watch” as he cited inflationary pressures and the Fed outlook.

“Inflationary pressures are building,” he said. “If we look at the economy… it is undeniable that it has been supported by the quantitative easing and the Fed’s balance sheet expansion. And as it disappears, it is just not plausible to think that we have no more headwinds in 2022 for risk assets and in the “The signals from the bond market are starting to look like a period before the recession.”

Inflation will remain higher than most people expect throughout 2022, Gundlach added. “Economists believe it will go back to around 2.5% in the first quarter of 2023. That’s a little bit of wishful thinking when we start up at around 7%,” he said.

Looking at the end of the year, inflation is likely to slow and avoid the stagflation scenario of the 1970s, said CIBC World Markets CEO and chief economist Avery Shenfeld.

“The next two years are unlikely to be a repeat of the ’70s show, with more growth and less inflation than a stagflation mark would suggest. Even with an omicron stop in Q1, Canada’s growth should still be solid at 3 “5% interval in 2022, with the US slightly higher, and although inflation will, on average, exceed central bank targets, it will end the year at a more tamed level,” Shenfeld said.

The second half of 2022 is likely to see more growth, lower inflation and tighter monetary policy, Shenfeld added. “If March, as we expect, brings an improvement on the Covid front, that month will also mark the start of a tightening cycle from the Fed… with the aim of keeping inflation steady in 2023 and beyond, when North America reaches full employment,” he said. .

According to ING forecasts, inflation should start to decline in the coming months, but it is likely to remain above 3% for the rest of 2022. “The assumption is that supply chain strains will begin to decline from summer onwards, while the upward impulse from housing should fall as rising mortgage rates bite. Higher borrowing costs, in general, should begin to take some of the steam out of the economy,” ING’s said. International Chief Economist James Knightley.

Other analysts see a divergent story unfold, with inflation rising in the US and declining in China. “We raised our inflation forecasts, with risks still on the upside. In China, on the other hand, inflation figures for December point to a easing of inflationary pressures,” ABN AMRO economists said in a note.

The Dutch bank now expects average CPI inflation of 4.6% in 2022, up from its previous forecast of 3.9%. “As 2022 progresses, we expect a pull from core commodity prices (mainly used cars) to be increasingly offset by higher service inflation. Last week’s wage report indicated an unusually tight labor market with 5.8% wage growth on a 3m / 3m annualized “Such strong wage increases have only just begun to affect service inflation, and we expect the labor market to become a greater – and more sustainable – driver of inflation in the coming months,” said Bill Diviney, senior US economist at ABN AMRO.

The situation in China is different as increases in the producer price index were driven by commodity-related sectors. “A relaxation of energy policy in Q4-2021 has already contributed to a relaxation of energy-related bottlenecks,” said ABN AMRO senior economist Arjen van Dijkhuizen. “We expect the CPI … to remain well below the PBoC’s target of around 3%. All in all, recent inflation developments allow the Chinese government to pursue piecemeal, targeted monetary easing.”

A great test for gold

With inflation running so hot across the globe and central banks starting to take the threat of rising price pressure seriously, gold will meet its real test this year. Last year, gold fell mainly due to lack of investor interest. By 2022, all eyes will be on how the yellow metal is doing as an inflation hedging asset.

“It can be argued that the positive argument for gold is its reputation as an inflation hedger, especially given the recent central bank record for recognizing how serious the situation is,” said OANDA senior market analyst Craig Erlam. “But with inflation likely to peak, it may not hold up. That said, fears of Fed austerity could also peak, which could support gold in the short term, and a breakthrough through $ 1,833 could signal that it is coming. further upwards. “

During the second week of the year, gold remained well supported, although interest rates around the world rose in response to more hawkish tones from central banks. In writing, February Comex gold futures traded at $ 1,820.10, down 0.39% on the day.

Gold bulls are returning to the precious metal this week as inflation trading gathers attention, said FXTM senior analyst Lukman Otunuga.

“Precious metals continue to draw strength from a weaker dollar and a slight decline in government interest rates with prices trading around $ 1826 at the time of writing. Inflation risks can also support upward gains for gold, which has often been seen as a hedge against rising prices. With inflation in the US, which jumps in December, this may encourage some investors to stick to their gold investments, “Otunuga said.

From a technical perspective, gold could move towards $ 1,845 if it closes above $ 1,831 per ounce. On the other hand, if it falls below $ 1,810, it could move towards $ 1,800 and $ 1,770 an ounce, he added.

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