If gold is an effective hedge against inflation, why didn’t Wednesday’s huge inflation data send the gold price much higher?
It’s a long-held belief (or fallacy) that investors should hold precious metals as part of a diversified portfolio. This is due to the supposed fact that the gold price increases in times of inflation and therefore is a great way to hedge this occurrence.
On Wednesday, the Consumer Price Index revealed that U.S annual inflation is growing at the fastest rate since 1982. The 4.3% rise in core inflation year-on-year (YoY) far exceeds the Fed’s elastic 2% threshold. Many may have been surprised by Gold’s muted reaction.
You could argue that runaway inflation will bring forward the timeline for policy tightening. The gold price should already be much higher than its current $1,820 level if its inflation hedge dynamics proved true.
Since the March pandemic low, the pet rock has increased by just 25%. In fact, this year it has shown a negative return of -5.42%.
Considering the US central bank alone has printed more than $10 trillion since March 2020, it’s surprising to see the gold price struggling around the $1800 level.
The fact is, industrial commodities have fared much better than gold as an effective hedge against inflation. Whilst the gold price has flat-lined in 2021, both crude oil and copper have returned more than +30%.
Both priced in US Dollars, they have benefitted not only from a weaker Greenback but supply-chain disruptions and the perception of increasing future demand.
The weekly chart outlines gold’s descending trend from the August 2020 high of $2,075.
It has bounced off the lower end of the channel on 3 separate occasions. The recent rally to $1,845 took the gold price close to the $1,865 top end of the range.
I would consider a failure to break out on the upside as a bearish signal. This will likely send the market lower, to the middle of the channel at $1,765.
I maintain a bearish bias on gold because if it cant rally on supportive news, it must decline on negative news. A close above $1,865 would cancel my bearish stance.
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