Why hot inflation matters and what next for gold

Most of the current generation of traders and investors have never seen an inflation print in the U.S. much above 5.5%, let alone north of 7.5%. Another firm print is expected next month, given the grim outlook for petrol prices in the coming weeks.

Looking beyond March, the magnitude of the inflation shock is likely to remain highly sensitive to the path that the war in Ukraine takes. As the war in Ukraine is likely much closer to the beginning than the end, the current dislocation in energy and commodity markets can continue.

When combined with a reversal in globalisation and increased defence spending, inflation looks set to remain elevated for some time yet. Apart from being a stealth tax on savings, the risk of persistently high inflation is that expectations can become unanchored or entrenched at higher levels. A prognosis for which the only antidote is aggressive interest rate hikes.

Taking it a step further, the risks of aggressive rate hikes into slowing growth is often a recession. Not deterred by this, the ECB, currently at the epicentre of the crisis in Ukraine, delivered a hawkish surprise overnight, accelerating the rate of taper for its bond-buying program. An action that suggests the ECB sees high inflation as a greater risk than slowing growth.

Given the environment outlined above, where are the opportunities for traders and investors?

We continue to like gold as a hedge against the inflationary debasement of fiat currency, geopolitical tensions, and equity market volatility. Should gold see a sustained break above the $2075 high, it would signal the current retracement is complete and that the next leg higher has commenced.

The target for the move would then be $2200/50 which would complete the impulsive advance from the November 2016 $1046 low.

Source Tradingview. The figures stated areas of March 11th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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Most of the current generation of traders and investors have never seen an inflation print in the U.S. much above 5.5%, let alone north of 7.5%. Another firm print is expected next month, given the grim outlook for petrol prices in the coming weeks.

Looking beyond March, the magnitude of the inflation shock is likely to remain highly sensitive to the path that the war in Ukraine takes. As the war in Ukraine is likely much closer to the beginning than the end, the current dislocation in energy and commodity markets can continue.

When combined with a reversal in globalisation and increased defence spending, inflation looks set to remain elevated for some time yet. Apart from being a stealth tax on savings, the risk of persistently high inflation is that expectations can become unanchored or entrenched at higher levels. A prognosis for which the only antidote is aggressive interest rate hikes. 

Taking it a step further, the risks of aggressive rate hikes into slowing growth is often a recession. Not deterred by this, the ECB, currently at the epicentre of the crisis in Ukraine, delivered a hawkish surprise overnight, accelerating the rate of taper for its bond-buying program. An action that suggests the ECB sees high inflation as a greater risk than slowing growth.

Given the environment outlined above, where are the opportunities for traders and investors?

We continue to like gold as a hedge against the inflationary debasement of fiat currency, geopolitical tensions, and equity market volatility. Should gold see a sustained break above the $2075 high, it would signal the current retracement is complete and that the next leg higher has commenced.

The target for the move would then be $2200/50 which would complete the impulsive advance from the November 2016 $1046 low.

Source Tradingview. The figures stated areas of March 11th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation