The Consumer Price Index figures released by the U.S. Department of Commerce on May 12 show inflation has sped up and at a faster-than-expected rate. CPI rose 4.2% from a year earlier, higher than the previous month’s 2.6% increase and beating the 3.6% expectation; month-to-month CPI change rose to 0.8% from 0.6% in March, faster than the expected 0.2%. The increase in Producer Price Index, released on May 13, also rose to 6.2% from 4.2% previously, higher than the expected 5.9%.
The two sets of figures show U.S. inflation is accelerating at a much faster rate than expected. However, the Federal Reserve has been largely dismissive of the risk, with the majority of committee members and governors saying they would support maintaining a dovish monetary policy. Bloomberg News earlier reported that Christopher Waller, one of the Fed governors, believes that increase in inflation is only transitory, and that the Fed requires more data before it will start contemplating discussion on monetary policy adjustment. He made it clear in his comment that the Fed will not pull back the current monetary policy because of rising inflation in the short term.
Weaker Dollar on the Back of Rising Inflation
In the meantime, the latest employment and retail sales figures released in the U.S. fell short of expectations. Not only was that a negative shock to the financial markets, it also solidified market consensus that the Fed will not start tapering anytime soon. With the Fed sticking to its guns even as inflation heats up, and the worsening economic figures, selling pressure on the dollar began flooding the market immediately, leading to its plunge. As for gold, which is often considered an inflation hedge, prices have outperformed in recent months. At the same time, global equity markets are showing signs of heating up because of inflation concerns across different regions. Investors worry that inflation may strike a blow to the recovering economy, while the emergence of new waves of the pandemic in multiple countries is causing different levels of market fluctuations. Meanwhile, the Israeli-Palestinian conflict in the Middle East has raised geopolitical tension. Under this environment, risk-averse investors have been providing support to gold prices and helping the asset class to outperform the market.
Earlier, Tesla’s founder Elon Musk said the company would stop accepting Bitcoin as payment for its electric vehicles. There were even rumors on the internet that Musk may be considering selling the Bitcoin he has earlier bought for US$1.5 billion. On the other hand, the China Securities Journal, a state media, reported Bitcoin is now being “blocked” by some large commercial banks, implying that cryptocurrencies may come under tight official control in the future. CITIC Bank has also released a statement banning the use of the bank’s accounts for trading Bitcoin. Hit by all these negative news, Bitcoin and most other cryptocurrencies have suffered wild fluctuations which turned into a major rout. This has led funds to shun cryptocurrencies and return to traditional physical gold assets, which helps to push gold prices further up.
Short term profit-taking followed by push to new high
Spot gold prices’ rebound from the US$1,667 trough in March has now accumulated a sizable gain. As such, we will not rule out the possibility of profit-taking in the short term. However, under the premise of rising inflation and a weak dollar, we believe gold prices will continue to test higher ground after a period of adjustment and stabilizing.
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This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited.