Gold Finds Support as Key Inflation Rate Hits a 30-Year High

Contrary to popular belief, what’s good for the goose is not always good for the gander.

Last week the U.S. dollar advanced against a basket of foreign currencies to hit its highest level in about a year. For consumers and importers, this is good news, as it means the greenback offers greater purchasing power.

For exporters, on the other, and for the price of gold and other commodities that are priced in U.S. dollars, this is a headwind. In the chart below, you can see that gold and the dollar share an inverse relationship. When the dollar strengthens, the yellow metal falls; when it weakens, gold soars. It’s important for investors to recognize this relationship because it can help them manage their expectations.

It’s also important for investors to keep in mind that gold continues to be one of the most heavily traded assets on the planet, in case they were wondering if Bitcoin is stealing some of its thunder as a store of value.

I often tell people that gold is the fourth most liquid asset, but the most recent data from the World Gold Council (WGC) shows that it’s actually the second most liquid asset following S&P 500 stocks. The precious metal’s average daily trading volume for the one-year period through September 28 was $183 billion, compared to the S&P 500 with nearly $235 billion in average daily volume. That dollar amount is enough to beat currency swaps as well as all government and corporate debt. The WGC measures gold’s liquidity by looking at data provided by global commodity exchanges, over-the-counter (OTC) markets and gold-backed ETFs.

Inflation Surging at Fastest Pace Since 1991. Will Gold Benefit?

Gold traded slightly up last Friday following the release of economic data showing that consumer prices jumped the most in 30 years. The personal consumption expenditure (PCE) index, which reflects changes in the prices of goods and services purchased by U.S. consumers, rose 4.3% year-over-year in August, the ninth straight month of accelerating inflation.

The PCE, by the way, is the Federal Reserve’s preferred measure of inflation. Fed Chair Jerome Powell, who earlier this year predicted inflation would be “transitory,” admitted last week during a Senate hearing that the bottlenecks and supply shortages that have contributed to higher prices were “frustrating,” and that we should see more of the same pressures into next year.

It’s not just the price of consumer goods that are soaring right now. Home prices, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose 19.7% in the year ended July 2021, the highest annual rate since the index began in 1987. Apartment rents around the U.S. are also heating up. According to Zillow, the average listed rent in August was up 11.5% compared to last year, which some cities in Florida, Georgia and Washington seeing increases of more than 25%.