Inflation’s Up; So What?
Here’s a strange headline for you: “Gold prices near daily highs despite better-than-expected inflation in October.”
This headline is bizarre on a couple of levels. First, since when are rising consumer prices and good news? And second, why wouldn’t inflation be good for gold?
You really have to buy into the mainstream narratives to write that headline.
Consumer prices did, in fact, come in higher than expected in October, according to the latest Labor Department report. The Consumer Price Index increased by 0.4% last month. In the 12 months through October, CPI came in at 1.8%. Core CPI was up 2.3% after a 2.4% rise in September.
This is “better than expected.”
Better.
Think about that for a moment. The headline writer is telling you that having to spend about 2% more every year on healthcare, recreation, vehicles and rent is good for you.
Congratulations.
Of course, the reason the mainstream considers this good news is because the Federal Reserve intentionally tries to maintain a 2% inflation rate. Yes — the central bankers think it’s important for your spending power to decrease every single year.
Mainstream pundits will also tell you that rising inflation is bad news for gold. The headline hinted at this fact. Gold was pushing daily highs “despite” the inflation report. This is because pundits expect the Federal Reserve won’t cut rates any more if inflation heats up. Heck, it may even raise rates.
This is completely backward thinking.
In the first place, while higher CPI data may slow the Fed’s roll on rate cuts, Fed Chair Jerome Powell has already indicated he has no intention of raising rates, even if inflation heats up. He said that it would take a “really significant” and “persistent” move up in inflation before the central bank considers rate hikes. Basically, Powell conceded that the Fed wasn’t going to be vigilant about inflation. As Peter Schiff put it in a recent podcast, rate hikes are the furthest thing from their mind.
They’re not even considering raising rates right now. So, the only thing that they’ll do is cut rates or leave them alone … This is a very dovish stand for the Fed to take. Probably the most dovish stance I’ve ever seen the Fed take with respect to its supposed tolerance for inflation.
And regardless, despite what the Fed may or may not do, inflation is not bad news for gold.
Keep in mind, an interest rate is nothing but a price. It’s the price of money. When there is inflation, interest rates go up just like any other price. Contrary to popular belief, this is not bad for gold. Quite the opposite. This is all bullish for gold. Gold is an inflation hedge. That’s what it’s for.
If you think there’s going to be more inflation, you buy gold. But perversely, the way the markets work now, you sell gold if you think there’s going to be more inflation. In fact, you buy the currency of the country that is experiencing more inflation, which is kind of counter-intuitive because inflation by definition is the currency losing value. So, if the currency is losing its purchasing power, why would you want to buy more of it?”
As Peter pointed out, speculation about what the Federal Reserve may or may not do now drives the market more than this fundamental truth. Everybody thinks higher inflation increases the likelihood the central bank will raise interest rates and embark on tighter monetary policy.
Peter compared inflation to a fire. The Fed is going to have to ignore the fire. That means it will get worse. The fire will get bigger because the central bank thinks putting it out will do more harm than letting it burn.
If traders understood this – that higher inflation just means that it’s going to get even worse – then they would be dumping the dollar. They would be buying gold.”
