Inflation Conundrum Results in a Rally in Both Equities and Precious Metals

The Fed made it clear that they would continue to let inflation run hot compared to their previous monetary mandate. Whether current inflation levels are temporary or sustained will determine when and how much the Federal Reserve raises rates.

Last week’s announcement by the Federal Reserve that they have penciled in two interest rate hikes in 2023, and they are now talking about a timeline to taper their asset purchases sent the equities and precious metals markets into a meltdown last week.

However, today we witnessed a 180° reversal in both equities and precious metals, resulting in both financial markets yielding strong gains. The Dow Jones Industrial Average gained 586 points (+1.76%) today, and the precious metals across the board had a strong upside bounce. Today’s reversal in the markets is partially due to statements made by two Federal Reserve members, Dallas President Robert Kaplan and St. Louis Federal Reserve President James Bullard.

Both spoke today at a webinar sponsored by the Official Monetary and Financial Institutions Forum, saying that they see high inflation persisting in 2022 above the 2% target of the central bank and at a stronger rate than many of their colleagues predict.

According to MarketWatch, George Saravelos, currency strategist at Deutsche Bank, argued, “But a reading of the reaction across financial markets may be signaling that investors don’t think the Federal Reserve will have room to raise rates very far once the hiking cycle begins.”

As of 5:20 PM EST gold futures basis, the most active August 2021 contract is up $14.50 and fixed at $1783.50. Based upon our technical studies, gold closed above a key and critical area. This study is based upon a Fibonacci retracement which begins at the second low, creating a double bottom at the end of March, to the highs that occurred at the end of May when gold traded to $1918 per ounce. Last week’s tremendous downward move in gold pricing resulted in gold closing at $1769 an ounce on Friday.

That is the exact price point that the 61.8% Fibonacci retracement occurs from the data set mentioned above. Today gold opened below that price point at $1764.30 but rallied and closed well above that key level, closing up just shy of $20 from the lows. That could be signaling a technical bounce to the upside towards current resistance at $1795.40, which is based upon the 100-day moving average. This could be indicating that gold became extremely oversold, and many traders sought to buy the dip created from the massive declines from last week.

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Wishing you, as always, good trading and good health,

Gary S. Wagner