Today’s CPI number shocked the markets and sent them bouncing. Here’s the fallout...and the implications for gold.

May 12, 2021

Dear Fellow Investor,

You know that I’ve been expecting the return of inflation.

And not the kind of “transitory” price increases that the Fed has been peddling...but real, embedded inflation trends that will mark a new era of dollar depreciation.

But I never expected anything like what we saw this morning. And neither did anyone else.

First off, no one had blinders on. Combining recent indicators from materials and services prices with the base effect coming from the year-over comparisons to the beginning of the pandemic, the consensus expectation was for a big increase this month.

The headline number was expected to come in at 0.2% increase, with the core rate at 0.3%. These would have been fairly hot in their own right.

But get this: The headline number came in at a mind-blowing 0.8% month-over-month. And there was no downplaying the impact with the core rate, as it came in at 0.9%.

That headline number equates to a 4.2% rate of inflation year over year.

As our friend Peter Boockvar remarked in the subject line of his response this morning, the “Fed is half way to 2% annual target IN ONE MONTH.”

Peter doesn’t use all-caps too often, so that gives you some idea of how shocking these CPI numbers were. As he noted in his email,

“That core rate gain is the most since 1982. No easy comp influence here. Just a plain old spike in prices....

“Bottom line, you've heard me rant about rising inflation pressures for about a year now, ever since it started to show up at supermarkets. It now is widespread and showing up in the government stats and this is even before wage increases of note that are now kicking in. Markets and the Fed better hope this is temporary but unfortunately I repeat my belief that it won't be. Fed policy is so out of touch with reality it is scary and the 5 yr inflation breakeven is now rising to the highest since 2005 at 2.80%.”

The Markets Respond…

How did the markets react to this stunning CPI report? Not well...

The U.S. stock market took a nose dive. As I write, the Dow is down 1.25%, the S&P 500 is off 1.5% and the tech-heavy Nasdaq has fallen 2.25%.

The 10-Year Treasury yield immediately spiked on the news and has continued to creep higher during the day, which hasn’t helped gold.

The Dollar Index initially jumped (sending gold falling), then it dropped (pushing gold back into the green) before rallying again (and tanking gold again).

So, it seems that gold is reacting, today at least, more directly with the dollar than anything else. Overall, the idea that a hot inflation number may lead to tighter Fed monetary policy remains the big driver for all markets.

Gold’s early-morning rebound gave me hope investors were remembering that gold is the best hedge against rapidly rising inflation/currency depreciation.

I guess not...at least not yet. No worries. Sooner or later, investors will realize that, while the Fed will have to raise rates as inflation rises, they will be forced to keep rates well below the rate of inflation.

To keep the house of cards they’ve built in financial assets intact...and to prevent debt-service costs from overwhelming federal spending...they will have to maintain negative real rates going forward.

It’s only a matter of time before investors come to understand this, and that’s when we’ll see gold and silver truly respond.

In the meantime, the Fed continues to assert that all of these inflationary pressures are transitory, and due to supply-chain disruptions in the wake of the pandemic shutdowns. As Wall Street Journal reporter Justin Lahart commented in today’s Heard on the Street column:

“Part of why is that, eye-popping as some of the price increases over the past year have been, higher inflation hasn’t embedded itself in consumer psyches. Americans under 60 have next to no experience of what it was like when inflation was such a problem that popular musicians were singing about it, like Marvin Gaye did in 1971 (“Inflation no chance/To increase finance”) and again in 1972 (“The nation’s taxation/Is causin’ all, all this inflation”).

Marvin Gaye, of course, was a musical genius. He was also a perceptive observer of social — and apparently economic — trends.

It’s important to realize that back when he wrote those words, it was illegal for him and other American citizens to protect themselves from inflation by owning gold.

Thanks to my late friend Jim Blanchard, we have that advantage today. Today’s red-hot inflation numbers reinforce the fact that we need make sure we use it.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference