Gold Analysis – A Dire Prediction by the Federal Reserve Bank of Cleveland for the First Quarter of 2022

Gold Price Analysis

Gold pricing recovered today after trading to a low yesterday of approximately $1886.90. That price point corresponds to critically Fibonacci retracement level of 61.8%. The data set used to create the Fibonacci retracement series begins at the end of January when gold was trading at $1779.10 and concludes at the most recent high which occurred on March 8, when gold traded to $2078, just $10 below the record high. The rally from the end of January to the first week of March resulted in gold gaining roughly $300.

The fact that gold was able to gain $300 in light of an extremely aggressive Federal Reserve who is likely to combat the spiraling level of inflation shows how strong the demand for gold currently is.

Federal Reserve Moves, Inflation and Interest Rates Forecasts

Chairman Jerome Powell stated at the last press conference that the level of inflation necessitates an aggressive change in their current monetary policy on two fronts. First, they have committed to raising the Fed Funds rate at each of the six remaining FOMC meetings this year. Initially, it was believed that each rate hike would be ¼%. However, recent data suggests that inflationary pressures continue to spiral at a faster pace than anticipated, with no signs that inflation is going to abate anytime soon.

Today the FedWatch tool is indicating that the probability of a ½% rate hike has gone down slightly to 66.6%, with the probability of a ¼% rate hike now at 33.4%. However, that could all change tomorrow when the government releases the most recent PCE inflationary index for February.

PCE and CPI Index Forecasts

Currently, the Federal Reserve Bank of Cleveland has released its estimates and forecasts for both the PCE and CPI index. Their forecast indicates an increase in the PCE of 0.62% year-over-year. They also have made a prediction on the CPI index for March, which will be released next month. Their forecast is based upon data from the Bureau of Labor Statistics, Bureau of Economic Analysis, Energy Information Administration, Financial Times, and Haver Analytics.

Based on their analysis they are forecasting that the CPI index for March will come in at 8.41% year-over-year and that the March PCE will increase by 0.75% year-over-year. However, the most alarming prediction is for the inflation level for the first quarter of 2022, which they estimate will indicate the rate of inflation will come in at 9.01% when compared to the first quarter of 2021.

The Federal Reserve is battling a level of inflation that for the most part is uncontrollable. The war in Ukraine has severely diminished the ability of Russia and Ukraine to produce and export grains to the European Union, which most certainly will raise the cost of food. Russia supplies a large percentage of energy products to the European Union, which will also be greatly diminished continuing to pressure crude oil, gasoline, and natural gas to higher prices.

Crude Oil Impact on Inflation

Crude oil continues to remain firmly above $100 a barrel, with the most active crude lite futures contract today up 3.04% at $107.41 per barrel. As long as the supply of energy and food costs continues to diminish costs will most certainly increase. This can only lead to greater inflationary pressures.

Historical Inflation Rates and Forecast for First Quarter of 2022

The highest level of inflation in recent history occurred between 1979 and 1981. During these years inflation levels were at double digits with 1980 having the highest inflation level in recent history at 13.58%. If the forecasts by the Federal Reserve bank of Cleveland are correct and inflation for the first quarter of 2022 is above 9%, that would be the highest level of inflation in 43 years.

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Wishing you as always good trading,

Gary S. Wagner