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Low US inflation and its IMPACT on gold
The US CPI inflation rate fell 0.1 percent in May, after a 0.8 percent drop in April. This decrease is mainly due to lower energy, transportation and clothing prices. The core CPI fell 0.1 percent, after a 0.4 percent drop in April. This was the third consecutive monthly decline, which occurred for the first time in the history of the index that started in 1957. However, compared to the previous month, we see some stabilization in the inflation forces, at least monthly.
On an annual basis, the overall CPI rose by only 0.2 percent (seasonally adjusted and only 0.1 percent without seasonal adjustments), after a 0.4 percent increase in April. It is the smallest increase in 12 months since October 2015. The core CPI has risen 1.2 percent over the past 12 months, compared to a 1.4 percent increase in the previous month. This was the lowest increase since March 2011. Both indicators are much lower than they were a few months ago.
Powell and Gold Press Conference
Powell said the Fed is considering targeting the yield curve, similar to the Bank of Japan. If this method is adopted, this policy should include very low interest rates for a longer period, thus supporting the gold price. Powell also indicated that interest rates will remain low at least until the unemployment rate returns to normal
So, I think we should be humble about our ability to raise inflation, especially when unemployment is higher than most normal rate estimates.
This means that even if inflation rises, the Federal Reserve will not act in a strict manner as long as the unemployment rate is lower than the normal rate of unemployment. Given the recent low inflation, the Federal Reserve will surely be very cautious. What is important here is that Powell expects a major recession in the labor market. In other words, the coronavirus will lead to permanent job loss. But it may take a few years before we return to normal market conditions.
Powell is concerned about the second wave of coronavirus infections. It is believed to be another factor behind the gradual recovery, not necessarily the V-shape
Gold implications
What is the impact of that on the gold market? Powell's recent press conference indicated that there is still a long way to recover as this statement is a positive signal for gold for many stock market investors as people are starting to worry that new infections with viruses that could hamper the pace of economic recovery. As a result, the Dow Jones and Standard & Poor's 500 Indexes experienced the biggest weekly falls since March. The desire for weak risk should be positive for safe-haven assets such as gold. Moreover, low inflation with an uncertain recovery means that the Fed is cautiously dealing with the coronavirus staying with us for years, which - from the fundamental point of view - should also support gold prices.
