The morning of 12 May 2021 saw the spectre of inflation finally return to Wall Street. As most investors and analysts were probably just making their way to the office, the Bureau of Labor Statistics published its latest consumer price index (CPI) for the USA. Released exactly one hour before the start of trading in New York, the figures caused a scare when it sank in that consumer prices in April had shot up 4.2% (see graph) on the figure for the same month the previous year, meaning the USA had recorded its highest inflation rate since 2008. While economists had anticipated a significant upturn, at 3.6% the consensus estimate was well below the actual CPI figure. Wall Street responded immediately: while the S&P 500 Index declined by 2.2%, the Nasdaq 100, which contains rather inflation-sensitive tech stocks, dropped 2.7%. The price of gold also slipped into negative territory on 12 May – although the brief correction ultimately proved to be merely a pause for breath before the attack on the USD 1,900 barrier. Exactly two weeks after publication of the inflation data, the fine ounce was climbing beyond this threshold for the first time since January.
With the latest advances, the precious metal has bucked in exemplary fashion the downward trend that began in August 2020 (see chart). Its status as a protection against inflation is only one of the fundamental drivers behind the rebound. Gold has traditionally correlated negatively with the US dollar. After flourishing briefly in the 1st quarter, the greenback has recently once again softened significantly against the euro, Swiss franc, etc. This has made gold cheaper for buyers from other currency areas. On top of this is the fact that interest rates continue to hover at low levels. Although the 10-year US Treasury is currently offering 1.58%, almost 70 basis points more than at the end of 2020, given the tangible pick-up in inflation the real interest rate is well into negative territory. In addition, leading representatives of the US central bank never tire of emphasising that the latest jump in CPI is only a temporary phenomenon, pointing to the base effects associated with the lockdown a year ago. The currency guardians are accordingly repeating their mantra that they want to go on supporting the world's largest economy with an ultra-loose monetary policy.
Once again, gold has seen demand over the last few weeks as a safe haven. The flare-up in the conflict between Israel and Palestine and the forced landing of a Ryanair flight in Belarus, with the subsequent arrest of an opposition activist, make it clear that while much seems to be dominated by coronavirus at the moment, geopolitics remains a risk factor. Turbulence in the cryptocurrency segment also seems to have played a role in the comeback of gold. Bitcoin, the most important representative of digital payment means, shed just under 40% of its value against the US dollar in May alone. This has had a marked dampening effect on the boom in cryptos, already now being labelled the "new gold". While investors were getting rid of Bitcoin and the like, they were also returning to the precious metal after a long period of abstinence. This is backed up by both net inflows in the ETF segment and high volumes on futures markets.
June will see a raft of meetings that may determine the direction of travel of the fine ounce. Investors should pencil 10 June in on their calendars. This is the day on which – at 1.30pm – the European Central Bank will be publishing its decision on interest rates. Of particular concern will be whether the ECB sticks with its relaxed attitude to inflation and consequently keeps the money taps open. Exactly one hour later after the press conference in Frankfurt's ECB Tower, the Bureau of Labor Statistics in Washington D.C. will be publishing the US consumer price index for May. Although the Fed primarily analyses core inflation, the US central bank is sure to be awaiting the CPI figures with as much concern as analysts and investors. The world will find out on 16 June how the US currency guardians assess the situation and whether they will adapt their policy in response. The two-day meeting of the Fed Open Market Committee will then close with the monetary policy decision, the latest projections and a media conference held by Fed chairman Jerome Powell. In short, gold is set to remain in focus into the summer.
