Gold blasts $30
higher as Fed ignores early signs of inflation by Blanchard Coins
| March 16, 2016
Is it the moment we’ve all
been waiting for? Last week Federal Reserve Vice Chairman
Stanley Fischer noted something unusual: “We may well at
present be seeing the first stirrings of an increase in
the inflation rate.”
But on Wednesday, the Federal Reserve ignored
Fischer’s comment and kept interest rates on hold, citing
“global economic and financial developments” that “continue
to pose risks.”
What’s more, it reduced its expectations
of raising rates four times this year to just two. And despite
Fischer’s take, it also lowered its inflation forecast to
1.2%, down from the 1.6% it predicted in December.
“Systemic risks” boost gold: The gloomy
outlook, which saw the Fed cut its U.S. GDP target to 2.2%
from 2.4%, sent gold soaring. After festering near $1,230
ahead of the meeting, the metal jumped about $30 and back
The Fed decision “implies that economic
growth is weak,” Van Eck Associates fund manager Joe Foster
told Bloomberg. “A weak economy and the inability to have
effective monetary policy creates all sorts of financial
risks, risks in the banking system, risks to the economy,
and those type of systemic risks are what gold rises on.”
Key gauges see rising prices: But is the
Fed missing the inflation boat? Not only is gold often an
early indicator of inflation, but three major price indicators
suggest that inflation is starting to take hold and at least
inch toward the bank’s 2% target.
1- Although the overall Producer Price Index (PPI) declined
in February, the core measure that excludes food and energy
prices rose 0.9% in the 12 months through February. “That
was the largest gain since July 2015 and followed a 0.8%
increase in January,” Reuters noted.
2- Additionally, the most recent Personal Consumption
Expenditure index (PCE), the Fed’s favored model, posted
a core gain of 1.7% over the year.
3- And the February core Consumer Price Index (CPI) showed
a 2.3% advance over the year, “its strongest annual gain
since 2012,” U.S. News & World Report noted.
“Trigger” for next recession:
Even a foreign journalist, Ambrose Evans-Pritchard of London’s
Telegraph newspaper, seized on the U.S. inflation picture
in an article titled “U.S. inflation rears its ugly head as
global cycle nears danger zone,” calling the nascent signs
of inflation “the trigger for the next global recession.”
The Fed “must acknowledge the uptick in the inflation stats
in their statement if they truly are dependent on the data,”
wrote Peter Boockvar at The Lindsey Group.
Win-win for gold: Whatever the Fed does with interest rates
this year, some analysts are seeing win-win scenarios for
gold. “If the Fed does nothing and says, ‘You know what?
We’re not going to raise the rest of the year,’ it will
crush the dollar and gold will go up higher,” Bloomberg
metals expert Ken Hoffman told the network before the Wednesday
Fed meeting’s conclusion.
“If they come out and say, ‘Hey, we’re going to raise a
bunch of times,’ the dollar will go a lot higher, yes, but
then these goldbugs think that’s going to crush the rest
of the world. Look at China, who has spent a trillion dollars
defending its currency, which it wants to get much weaker.
A stronger dollar would put even more pressure on China,
and who wants China going into the tank, and that makes
people rush to gold, so the goldbugs think they win no matter
what. … They’re looking at this as a big buying opportunity.”
“Hard to control” inflation: One danger in the Fed’s decision
to hold rates in place is that it might be misreading the
potential for inflation caused by its decade of near-zero
rates and massive amounts of quantitative easing. After
all, the Fed has been a notoriously lousy economic forecaster.
And inflationary wildfire is nothing to play with. As former
Fed chief Paul Volcker famously told the Economic Club of
New York in 2013, “All experience demonstrates that inflation,
when fairly and deliberately started, is hard to control
If the Fed is wrong about inflation in 2016 and beyond,
just as it was wrong about the gravity of the subprime-mortgage
crisis in 2007, the most prudent course of action is to
get prepared with precious metals.