Gold Continues to Factor in a Hawkish Fed, Taking Gold Lower

As of 5:30 PM EST gold futures basis, the most active February contract is currently trading down $16.70, which is a net decline of 0.93% and fixed at $1771.50.

Market participants reacted to an increase in producer prices in the United States as these increased prices will add to the current inflationary level. Today the U.S. Labor Department reported that producer prices increased by 0.8% in November. This takes the year-over-year producer price index to 9.6%. Concurrently the core rate of inflation rose by 0.7%, to 6.9% year-on-year. Last Friday’s report that the CPI price index spiked to 6.9% in the 12 months through November, and is the largest year on year rise since June 1982.

Collectively these recent reports indicate that inflation continues to spike higher and will probably remain more persistent than the Federal Reserve previously assumed.

According to Reuters, “U.S. producer prices increased more than expected in November as supply constraints persisted, leading to the biggest annual gain since the series was revamped 11 years ago and supporting views that inflation could remain uncomfortably high for some time.”

Both continued labor shortages coupled with rising prices most certainly will accelerate the current extremely high level of inflation and will increase the likelihood that the Federal Reserve will accelerate the tapering timeline to accommodate lift-off as they begin to raise the Fed funds rate earlier than anticipated. Tomorrow we will get our first look at the revised “dot plot”. This will be updated from the last release of the “dot plot” in September which indicated that there would only be one rate hike in 2022.

Currently, analysts have mixed views on how many rate hikes the Federal Reserve will pencil in next year. Estimates range from two rate hikes on the low estimates to four rate hikes on the higher end estimates.

According to senior economist Sal Guatieri of BMO Capital Markets, “U.S. inflation was even hotter than expected in November and is now running the fastest in nearly four decades, with little near-term relief in sight.”

UBS analyst Giovanni Staunovo summed up market sentiment by saying, “Market participants will closely track the upcoming Federal Open Market Committee meeting to see how the central bank reacts on elevated inflation, which will result in likely larger price moves.”

With data indicating inflationary pressures are continuing to move higher, the Federal Reserve will most likely act in an extremely un-accommodative and hawkish posture in regards to their adjusted monetary policy.

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Wishing you as always good trading and good health,

Gary S. Wagner