Strange Link Between Inflation And Gold

It was a strange day. Inflation surged yesterday. But gold dropped initially, only to quickly reverse the fall and fly into the air. What happened? And – importantly – will gold soar on the inflation fuel?

Inflation Rears Its Ugly Head (or Tries to, at Least)

The recent payrolls report showed that wages had jumped 2.9 percent in January on an annual basis. It was the best result since 2009, which awakened fears of inflation. That’s why investors awaited yesterday’s data on consumer prices. On Tuesday, we warned our readers: “(…) tomorrow, we will see the newest CPI report, which may affect the markets, given that inflation worries were one of the key reasons behind the recent stock market volatility.”

Indeed, we got a hot CPI print, which shook the markets. The prices jumped surprisingly high. The Consumer Price Index leaped 0.5 percent in January, following a 0.2-percent increase in December, as one can see in the chart below.

Chart 1: U.S. monthly CPI rate (in %) from January 2013 to January 2018.

The boost in energy prices was partially responsible for the move, that’s sure. But the core version of the index, which excludes energy and food, also rose. And it actually accelerated from 0.2 percent in December to 0.3 percent in January. It implies that inflationary pressures may settle in, although the rebound in apparel prices (change from -0.3 in December to +1.7 percent in January) did the job here.

Over the last 12 months, consumer prices went up 2.1 percent, while the core CPI increased 1.8 percent. The growth of both indices was the same as in December. So no acceleration here. Given the unchanged annual inflation rate, the fears of inflation may be overdone. When markets realize this, gold prices may correct.

Gold – Inflation Hedge or Safe-Haven?

Nevertheless, the investors focused on the monthly dynamics, as the January numbers marked the biggest increase in five years, adding to the recent worries about rising inflation. And how did gold react? Try to guess. As a famous inflation hedge, it probably jumped, right? Well, not quite. Surely, it ended a day with huge gains. But let’s look at the chart below. It displays yesterday’s New York gold prices, hour after hour.