On Monday, traders will learn whether recent inflation in producer prices spilled over into consumer prices…and, if so, gold may be the beneficiary.
Inflation data for the month of March indicated that there is a serious uptick in prices that producers pay for goods. At an annualized rate, prices grew 4.2%.
That’s a lot. In fact, it’s the largest jump in prices since 2011.
Amid fears of more even inflation, there’s an effort underway by traders to hedge against any inflationary pressures that continue emerging. Bitcoin has certainly proven to be one “go-to” investment for those that fear inflation, and gold has–historically–proven to be a reliable hedge.
Gold for June delivery is currently trading near $1746 an ounce – but, with inflation data screaming “caution ahead” there’s a chance it could climb higher, perhaps even to the key $1800 level in the coming week(s) as inflation becomes more evident in fresh data.
Long-term, inflation is almost unavoidable given that the Federal Reserve–together, with the Biden Administration–are simultaneously printing money in one of the biggest stimulus efforts since World War II.
And the effects are already being felt with producer prices soaring.
The question now: will those rising prices spill-over onto consumers? We’ll know for sure when the Consumer Price Index for March 2021 comes out on Monday, April 13th at 8:30 am EST. If there’s a surprise to the upside (meaning inflation is running hotter than people have estimated) then both gold and bitcoin should theoretically rally.
Gold bugs are hoping for prices to break through $1800 in the coming week with a possible spike on Monday.
No, Gold Has Not Lost Its Luster
Gold hasn’t had the performance one would have assumed it would have in light of the Federal Reserve’s activities in the last year. In fact, gold has barely kept pace! Some argue that a result of new enthusiasm for bitcoin. Bitcoin is up roughly 700% in the last year, trading close to $60,000 per coin.
Bitcoin, like gold, has attracted investors that are wary of inflation and seeking an alternative to a sovereign-backed currency. In addition, bitcoin has rallied in part because it may be somewhat a beneficiary of inflation itself. Theoretically, then, gold should as well.
Meanwhile, there are question as to whether the market can continue its upside.
The stock market over the last year have proven unstoppable over the last year as investors bet on the benefits of more money in the system. But, at what point, does all that money in the system backfire? Courtesy of inflation?
Sooner than you think.
If inflation continues its massive uptick, the Fed will find itself in a situation where it is obligated to hike rates. And, if rates move up, then the fragility of the market itself could be exposed leaving the bulls highly exposed.
Why the Market May Be Nearing Its Top
It’s challenging to justify the market’s constant optimism. The S&P is trading at nearly 47 times earnings which is nearly THREE TIMES the historical average.
In fact, the market’s valuation doesn’t entirely make sense in an environment where corporations are being threatened with higher taxes and individuals may see higher capital gains tax rates.
Nonetheless, it shows you the power of the printing press. If the government continues its spending spree with money we do not have, the value of the dollar should suffer. As such, it will take many more dollars to value anything. The question, however, is at what point to traders recognize that optimism has run wild?
It may not be this week, this month, or even this year. But, this is a reckless policy by our Federal Government that may come with severe consequences.
For more on how to invest in gold, check out this primer here on Trish Intel.