Gold popped to a new 9-week high of 1292.05 in early New York trading, following more disappointing inflation data. While the yellow metal has been unable to breakthrough to new highs for the year above 1296.06, both the technical and fundamental biases remain to the upside.
U.S. CPI rose just 0.1% in July, below expectations of +0.2%, versus unchanged in June. The annualized pace of consumer inflation ticked up to 1.7%. Core CPI also rose 0.1% on expectations of +0.2%, versus a 0.1% rise in June. That left core consumer inflation unchanged at +1.7% y/y.
As expected, Fed rate hike expectations eroded further. September remains off the table, but the probability of a December hike tumbled to 35.9%. In an interesting twist, the CME’s FedWatch Tool is now showing a chance — albeit slight — for a 25 bps rate CUT!
Obviously the heightened geopolitical tensions have been the big driver in gold this week. Deescalating the situation is likely to prove difficult, with both sides seemingly digging in their heels. While the AP reports that back-channel communications between the U.S. and North Korea have been ongoing for several months, the risk of an unintended military confrontation remains very real.
We talked earlier this week about U.S. credit card debt exceeding $1 trillion again and surpassing the previous record high from 2008. It’s also worth noting that similarly, total household debt outstanding — inclusive of mortgages, credit cards, student and auto loans — has also reached a record high $12.7 trillion. Here too, the previous high occurred in 2008 just as the global financial crisis was unfolding.
This level of debt is of particular concern in light of wage stagnation. The average American is increasingly indebted, while not earning additional income to service that debt load. A rise in interest rates would be devastating, so the Fed must tread very cautiously here. However, even if rates stay steady, at some point this situation is going to take its toll on on our consumption driven economy. We are past due for the next recession.
Since the Great Depression, the U.S. has suffered thirteen recessions. The periods of economic growth between recessions have been as long as 120-months, and as short as 12-months. The average is right around 60-months. The time elapsed since the Great Recession ended in June 2009 presently stands at 97-months.
If growth collapses under the strain of this massive debt burden, the implications for the asset bubbles in equities and and housing could be dire indeed. While geopolitical risks may have started the flows toward more balanced portfolios this week, the economic realities that are coming into focus may sustain said flows, to the benefit of gold.