Inflation, gold, and the Fed

As noted on Monday, plenty of breakout-minded traders were probably keeping their eyes on the gold market recently, given prices had been stuck in a range for the better part of two weeks after pulling back in late November.

But February gold futures (GCG2) showed some signs of life the past couple of days, first falling to a nine-week intraday low on Wednesday (and dropping briefly below the range lows) before recovering and, on Thursday, following through with their biggest up day in more than a month and pushing above the range highs:

Wednesday, of course, is when the Federal Reserve announced it was going to accelerate its tapering process, and also revealed a majority of its Federal Open Markets Committee (FOMC) members expect three rate hikes next year.¹

Stocks jumped on the news, but so did gold—which may seem curious, since gold is often seen as an inflation hedge, and the Fed appeared to be taking steps to battle inflation. But aside from the fact that two days of price action doesn’t tell you much, it’s possible the gold market saw the Fed’s announcement as a sign the central bank—after downplaying inflation for many months—was acknowledging it as a more significant challenge.

Given the pace at which prices have been rising over the past year or so, some market watchers may feel that such as stance was a little late in coming. Barring a sharp downturn in December’s data (which won’t be available until next month), 2021 is poised to end with some of the highest inflation readings in decades. The Consumer Price Index (CPI) posted a hotter-than-expected 6.8% annualized gain through November, while the Producer Price Index (PPI) jumped 9.6% year over year—its biggest yearly increase on record.

And what has gold, the inflation hedge, been doing? Here’s a chart comparing monthly gold prices to the CPI from January 2020 through November 2021:

Specifically, between May 2020 and November 2021—when the CPI posted its biggest 18-month increase since 1982—gold fell around 12%. And while some people may be tempted to think the yellow metal was anticipating inflation when it rallied in early 2020, the bulk of that move is more accurately attributed to the initial COVID shock and stock-market sell-off.

In reality, gold’s historical track record as an inflation hedge is checkered (at best), with a good part of its reputation likely stemming from its rally in the late-1970s inflationary period.² More frequently, gold has tended to shine most—if sometimes relatively briefly—during periods of extreme market stress and surprise, such as the COVID shock, the August 2011 debt–ceiling crisis, the 2008–2009 financial crisis, and the September 11 terrorist attacks.

That type of behavior is very different from providing sustained protection against rising inflation. That doesn’t mean gold won’t rise if inflation continues to climb, but it suggests traders may want to de-couple their thoughts about gold’s price swings from their thoughts about inflation.

Today’s earnings include: Darden Restaurants (DRI).

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¹ Bloomberg. Fed Doubles Taper, Signals Three 2022 Hikes in Inflation Pivot. 12/15/21.
² CNBC.com. Gold as an inflation hedge? History suggests otherwise. 6/8/21.