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Everyone who has bought anything in the last year knows that inflation is real. However, this week we found out just how bad it is.
Wednesday, the U.S. Consumer Price Index saw an annual rise of 6.2%, the highest level in more than three decades. And while the idea that prices are rising isn’t new, according to some economists and market analysts, the fear is that the U.S. central bank is losing control of inflation.
The Federal Reserve appears to be losing control because there is not much they can do to stop the current price in prices. Inflation is being driven by a global supply crunch. A rate hike will not bring more microchips online or increase the amount of food in the grocery store. Rate hikes certainly won’t bring more oil production online to lower gas prices.
Before you dismiss the growing threat, we are starting to see the economic impact of rising inflation.
This morning, preliminary data from the University of Michigan showed that consumer sentiment in November dropped to its lowest level since 2008 as consumers were dealing with the effects of the Great Financial Crisis. The most significant factor behind the drop in sentiment was inflation.
Some economists will point out that weak consumer sentiment leads to less consumption, leading to lower growth. So the prospect of stagflation is now growing.
This fear is what has lit a new fire under gold and propelled prices to a five-month high. The precious metal has been seeing its best weekly gains since early May. December gold futures last traded at $ 1865.90 an ounce, up more than 2.6% from last week.
Gold is doing what it does best. Gold is the one solid asset that investors cling to when the chips are down and fear sweeps through markets. It has shown its value time and time again.
What makes gold’s breakout rally even more impressive this week is when you look at it in correlation to the U.S. dollar. The U.S. dollar Index is ending the week above 95 points, a 15-month high.
Gold can fight against the U.S. dollar's strength because as inflation grows, the purchasing power of the U.S. dollar continues to weaken. The latest CPI data from the U.S. showed that food prices rose 5.3% over the last 12 months.
To put that into perspective, consumers are looking at the most expensive Thanksgiving dinner in history just ahead of the holiday season.
However, gold has been able to maintain a stable purchasing power over the years.
By Neils Christensen
For Kitco News
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