Labor Department data showed a 0.5% drop in wholesale prices in the U.S. during September. This was well below consensus estimates of a 0.2% decline, and matched the steepest monthly drop for the measure since January. As a proxy for inflation, the wholesale miss would signal that deflation remains a serious risk, even in the U.S.
The disappointing numbers helped gold jump by about 0.5% as well this morning. The gold price broke through resistance to a 3-and-½-month high at $1,176/oz. This also means that gold has moved into a new range on the technical charts, approaching another “major technical resistance level” at $1,178 per ounce, according to market analyst Peter Hug.
Silver was also about 20¢ higher (+1.3%) to $16.20/oz. Both platinum (+0.7%) and palladium (+2.5%) were up solidly, as well.
Even with the most volatile components of price measurements like food and energy removed, wholesale prices still showed a -0.3% reading for September—its worst-ever since the BLS started tracking the measure in 2013.
Deflation in China
Part of the boost for gold (and drag on equities around the world) is continued economic weakness in China.
Judging by the consumer price index, inflation in the People’s Republic came in below estimates at 1.6% (against 1.8% expected). Although this is a far cry from the near-zero and negative price indices in Europe and North America, it still represents a cooling off of the Chinese economy. Like the Federal Reserve’s inflation target of 2%, the People’s Bank of China also (somewhat arbitrarily) targets 3% inflation.
On the other side of the equation of CPI, China’s producer price index (PPI) sank by nearly 6% in September. Unbelievably, this marks the 43rd consecutive month of declines for the country’s PPI measurements—in other words, 3-and-½ straight years of falling producer prices every month since early 2012.
Breaking down the 5.9% decline in PPI into some of its components, factory purchase prices were 6.8% lower; producer prices in the mining sector plummeted by 21.2%; and overall prices for raw materials fell by 11.4% year-on-year.
Many are convinced these kind of data will prompt the PBoC to introduce more monetary easing at some point in the near future.
Another factor playing into greater short-term demand for gold is the apparent fracturing of opinions among Federal Reserve Open Market Committee (FOMC) participants. Two Fed governors, Daniel Tarullo and Lael Brainard, have each recently expressed doubts as to the appropriateness of a 2015 rate hike from the central bank. (Both are also voting members of the committee.)
This position puts two members of the FOMC directly at odds with Chair Janet Yellen’s expectations. Although some dissenting opinions are to be expected among a group that numbers 12 different individuals, this is the first time that other voting FOMC members (St. Louis Fed President Bullard therefore excluded) have been as vocal about their disagreement with the chair’s position.
Such a division of perspectives could prove problematic for the Fed. The central bank can ill afford to be seen as internally indecisive on top of its track record of contradictory rhetoric and wavering commitment to how it carries out its mandates.
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