Gold Continues to Trade Lower Following a Strong U.S. Retail Sales Report

Federal Reserve’s Inflation Concerns Impact Equities: Kashkari’s Warning and Market Expectations

One could expect that the latest government report on retail sales revealing that they increased by 0.7% in July would garner a positive reaction in U.S. equities. However, it had the exact opposite effect taking all three major indices lower. This is because strong economic growth gives the Federal Reserve more latitude to continue to raise rates as they work to bring inflation down to its target of 2%.

Today, Neel Kashkari, President of the Minneapolis Federal Reserve Bank reinforced the idea of more rate hikes by the Federal Reserve this year when he said that the Fed “is not ready to declare victory in the battle over high inflation.” Kashkari made that comment in a discussion during the API Group’s Global Controllers Conference. He also added that “Inflation is coming down. We have made progress and good progress. I feel good about that. It’s still too high.”

According to an article in MarketWatch, “Kashkari, who is a voting member of the Fed’s interest-rate committee this year, said that given the recent positive signs on inflation, the Fed can take a little bit more time to get some more data before we decide to do more. The Fed is a long way away from cutting rates because core inflation is still around 4%.”

Kashkari framed his comments with a warning about not repeating the monetary policy of the Federal Reserve in the 1970’s saying he wanted to avoid repeating the experience.

Tomorrow market participants will gain more insight into the internal thought process of Federal Reserve members when the minutes from last month’s FOMC meeting are released. The Federal Reserve Bank of Atlanta released its latest estimate of GDP growth at 5% today. The Atlanta Fed uses a modeling system they developed called GDPNow, which is based on using available economic data for the current measured quarter.

Gold Price Forecast and US Dollar Correlation

The truth is that further rate hikes by the Federal Reserve will provide more bearish tailwinds for gold evident in today’s continued decline in gold prices. Gold has declined for the last seven consecutive trading days. Beginning on August 7 gold prices began a correction which has been characterized by a series of lower lows, and lower highs when viewed on a daily chart. On Monday, August 7 gold traded to an intraday high of $1991 almost $50 above today’s intraday high of $1944.30.

As of 4:50 PM EDT, gold futures basis the most active December contract is currently down $9.80 or 0.50% and fixed at $1934.30. The vast majority of today’s price decline was based on traders bidding the precious yellow metal lower with an extremely fractional loss from dollar strength. Currently, the dollar is up 0.06% taking the index to 103.12.

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Wishing you as always good trading,

Gary S. Wagner