SPX continued with the losses. CPI slowed down. IMF cut its projection of global growth. What does it all imply for the gold market?

Stock Market Turmoil Continues

Let’s start from the US stock market. On Thursday, the SPX  extended its losses, declining about 2 percent. It means that traders continued their liquidation sale of risky assets and moved into safe havens, such as gold. The yellow metal jumped above $1,220 on Thursday, as one can see in the chart below.

Chart 1: Gold prices from October 10 to October 12, 2018.

Fundamentally, we do not see reasons to panic. At least not yet. Of course, the financial system is nowadays quite fragile as it used to live on a drip from the Fed. The tightening of monetary policy ends the year of ultra low interest rates and easy money, so certain corrections are inevitable. However, the bond yields are still historically very low, so the elevated stocks valuations might be actually justified. Hence, gains in gold might be temporary, unless the correction transforms into a genuine bear market, or the Fed becomes more dovish.

Inflation Slows Down

Or we will see the acceleration in inflation. But now we’re seeing the opposite. The CPI rose 0.1 percent in September, following an increase of 0.2 percent in August. The core CPI also moved up 0.1 percent, the same change as in the previous month. Over the last 12 months, the consumer prices jumped 2.3 percent, compared to 2.7 percent increase in August. The slowdown was mainly caused by a notably smaller increase in energy prices. The index for all items less food and energy climbed 2.2 percent, the same as last month, as the next chart shows.

Chart 2: CPI (green line, annual change in %) and core CPI (red line, annual change in %) over the last five years.

Hence, the inflationary pressure eased somewhat in September. However, inflation is still slightly above the Fed’s target. So we don’t expect any changes in the Fed’s policy of gradual hiking the federal funds rate. Surely, trade disruptions and rising shelter prices may actually support inflation in the near future, but there will be no price revolution. And we bet that the new FOMC with Powell as a chair will not allow for a sudden surge in inflation. Precious metals investors should remember about that.