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Did Gold Just Say “Bring on Disinflation”?


Is 2014 deja vu? Que 2008.

Christopher-LemieuxSMBullion.Directory precious metals analysis 14 November, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

Gold is worthless because there is “no inflation,” yet the University of Michigan inflation expectations report shocked-and-awed, driving gold higher – marking a $30-plus dollar 180.

In 2008, gold and silver fell. Inflation expectations declined. Crude collapsed, and the dollar shined. Are we now in the beginning of the bust cycle?

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The yellow metal was getting a mini beat-down, falling through $1,150 per troy ounce on a minor beat on retail sales. Retail sales rose .3 percent, a tenth-percent better than analysts’ estimates. However, it was the inflation expectations out of the U of Michigan that lit the fire under gold.

The data showed an all out collapse in the five-year inflation expectations, dropping from two percent to under one percent. The one-year inflation expectations fell to 2.6 percent, the lowest level since 2010. Interesting to note, the last year the five-year inflation expectation was below one percent were in 2008 and 2009. And, if anyone remembers, those were not grand days for the economy or risk assets. By 2009, the US seen sharp deflation.

What is more telling, in my opinion, is that inflation remains stubbornly low in the eyes of central bankers. Naysayers that believe gold holds no value during disinflation may want to look once more. Central bankers love inflation. It’s like tea at high-noon, and they will do anything do bolster inflation. Need we look over to Japan, where Abeconomics has now been dubbed “Banzaionomics?”

Fed Chair Janet Yellen has even said a stronger dollar will cap inflation in the US, and she believes growth cannot happen without inflation (it certainly didn’t with her policies). The precious metal has been rather stable considering the fickle rhetoric out of the Fed. Bullard, today, said an interest rate hike will be in 2015, but the timing will be “data-dependent.”

It looks like gold is getting a boost from low-inflation expectations in anticipation of what the Fed will do to reverse disinflation. The dollar, precious metals, and now inflation expectations are moving towards the same point in 2008. Crude is also a key component. In 2008, crude seen almost $147 per barrel before falling almost 80 percent by January 1, 2009. From 2014’s high, crude is now lower by 33 percent.

It’s as if the stars are aligning.


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