Gold rose $7.80 to $934.60 per ounce in trading in New York yesterday and silver was up 22 cents to $17.72 per ounce. Gold and silver continued to rise in Asia and early trading in Europe and gold reached new record highs just below $950 at $949.60 per ounce and silver has surged over $18 per ounce.
Gold also surged to new record highs in British pounds and in euro. The London PM Fix at 1500 GMT yesterday afternoon was at $920. Gold fixed at new record highs at £474.37 and €627.90.
Gold has surged on increasing inflation concerns with yesterday’s stronger than expected and sharply higher US CPI report. With the commodities complex continuing to surge and oil staying above $100 a barrel, inflation will continue to increase significantly in the U.S. and internationally. The Chinese reported inflation at an 11 year high at 7.1%.
Central banks risk creating a very dangerous inflationary spiral should they continue trying to alleviate macroeconomic and systemic risk by lowering interest rates in what is a very inflationary environment.
Consumer Price Index in January: up 0.4% (seasonally adjusted) from December (consensus forecast: up 0.3%) for a 12-month overall inflation rate of 4.4%, up from the 4.1% inflation rate recorded in December. Energy prices jumped 0.7% in January after surging 1.7% in December. The year-year increase in energy prices was 19.6%. The compound annual increase in energy prices over the last three months is 43.6%; energy represents almost 10% of the consumer price index. Gasoline prices increased 1.0% in January and are up 34.5% year-year after recording a 29.6% year-year increase in December.
Stagflation has clearly emerged and this is obviously very bullish for gold especially with the current supply/demand imbalance. As pointed out yesterday, ‘economics 101’ is that weak supply conjoined with strong demand will result in higher prices. Finite natural resources, such as gold, silver, platinum and palladium, are being chased by a vastly growing money supply internationally and by vastly growing global population in terms of demographics and wealth.
Despite gold being the top performing asset class of recent years, months and weeks much of the media has ignored and failed to properly report what is going on in the commodity and precious metal markets. Thus the majority of investors remain unaware of the importance of diversifying into gold and even of the ways to do it. Those that have diversified into gold are a tiny section of the investment population and this shows that gold remains the preserve of the smart money. When gold becomes front page or headline news in the press in the coming years and enters the investment mainstream, it will be time to reduce allocations to gold and other precious metals.
We remain in the early phases of this bull market, akin to gold at some $200 per ounce in 1973. Gold rose from $35 in 1971 to some $200 per ounce in 1973 prior to gold again increasing significantly in the next 7 years. When gold reaches its inflation adjusted high of $2,400 per ounce in the next 5 to 10 years then it will be time to reduce allocations to gold and look again at what will then likely be undervalued stock and property markets.
Support and Resistance
After a short healthy consolidation in the $850 to $935 range, gold appears to have broken out. A close above $935 today and weekly close above $935 tomorrow will be very constructive. Strong support is now seen at $890 to $900. A close on a weekly or even daily basis above $935 should see us challenge $1,000 per ounce in a very short period of time.
The dollar was being pulled in two separate directions yesterday. Initially the U.S. inflation numbers proving stronger than originally expected gave a bid to the Greenback in the afternoon session. The publication of the FOMC minutes yesterday evening showed a Federal Reserve more worried about growth than inflation, keeping the potential for further U.S. interest rate cuts firmly on the agenda. This saw the dollar being offered across the board and further underpins the tone of dollar weakness.
The publication of the Bank of England’s meeting minutes also put pressure on Sterling which has been somewhat reversed this morning by stronger than expected retail sales figures. The trend in weakening of Sterling against the Euro is firmly in place. The growing dissatisfaction with Central Bank management is seeing investors shunning the major currencies for commodities and commodity currencies. This trend is set to continue.
The South African Rand continues to be the outlying commodity currency, as it continues to be plagued by both systemic and political concerns it is set to weaken further.
Silver is trading at $17.96/99 at 0900GMT. Silver remains extremely undervalued. Silver’s nominal high of $50 is likely to be reached in the next 3 to 7 years.
Platinum is trading at $2166/2120 (0900GMT).
Palladium surged to over $500 per ounce (0900GMT).
While these markets may be overbought in the short term, markets can remain overbought for long periods and it would be prudent to make the trend your friend.