DMR–CPI report stops gold in its tracks

DAILY MARKET REPORT

A benign U.S. consumer price report stopped yesterday’s gold rally in its tracks this morning.  Early on, the metal pushed past the $1210 mark and was up nearly $4 on the day. It is now down $3 on the day at $1204. Silver is down 4¢ on the at $14.21. Reuters reports that “Despite the moderation in price increases last month, inflation pressures are steadily building up, driven by a tightening labor market and robust economic growth.” The news service goes on to cite price increases building up in the supply pipeline resulting from tariffs on Chinese imports.

Yesterday, we posted our guess that some traders covered shorts in anticipation of the report. Those traders, if our hunch was correct, have apparently retreated to the sidelines – at least for now. Yesterday’s rally is a reminder how quickly things can change once sentiment shifts.

“[T]he net short on COMEX,” writes GFMS’ Rhona O’Connell in a report released yesterday, “was at record levels at end-August since the CFTC introduced its ‘managed money’ classification, at 244 tonnes. With outright shorts standing at 593 tonnes. Some short covering has ensued; we expect more and a sharp short covering rally is not out of the question.”

Inflation worries are one in a long list of concerns that could instigate the short-covering rally many gold market professionals anticipate.

Quote of the Day
“I wish Montagu Norman, Philip Snowden and the monetary experts were admirals or generals. I can sink them if necessary. But when I am talking to bankers and economists, after awhile they begin to talk Persian, and then they sink me instead.” – Winston Churchill, 1924

Chart of the Day

Chart note:  Growth in the money supply continues to be stubbornly restrained. That circumstance, however, does not necessarily signal weakness in the price of gold.  As this chart illustrates, the effect can be just the opposite. As the 2008 credit crisis unfolded, gold to the surprise of many proved its mettle as a hedge under disinflationary circumstances. Demand flourished among investors worldwide concerned about potential bank failures and a stock and bond market crashes. Even in the more placid economic setting since early 2016, gold has risen as monetary growth has slowed.  

 

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