Gold, insurance against the risk of a monetary policy error by the Fed

LEuropean PPI index is up 36.8% in March and is now well above theUK PPI index:

The surprise continuation of this figure of linflation is preparing us for an explosive rise in the prices paid by European consumers, starting in the coming weeks. Attempts to control prices will increase, and with them, the risk of shortages. Refusing to pass on this increase in prices paid by producers to consumers and wages risksaggravate an already very tense social climate across the continent.

Linflation, which so many economists had predicted as transitory, saccelerated. This week, itis therealuminum that sflies away:

Since the start of theyear, flour is up by +36%, milk by +35%, corn by +34%, while oil has been at more than $100 for almosta month and a half…

The price of gasoline is rising, but cis the diesel that breaks all records at the pump:

Lshutdown of the production chain in China, combined with soaring diesel prices, is a threat to theall road transport in Europe and the United States.

Don the other hand, the shift in European demand for Russian gas to American liquefied gas has led to a surge in natural gas prices in the United States. At the start of May, the 8% rise in a single day propels US gas prices to their highest since 2008.

Linflation shas already spread widely in wages across the Atlantic. The average wage cost is up surprisingly this month: lcost indexemployment is at an all-time high since 1995.

4.5 millionAmericans quit their jobs to try to find better pay. The gap between the number of bids demployment and job seekersemployment continues to grow. There are more than 5.6 million unfilled positions in the United States, adding upward pressure on wages.

This pressure on wages is also appearing in Germany, where theWPI index ssoared to a high since 1992:

This contagion ofinflation pushed the Fed to raise its interest ratediscount of +0.50%, despite the risks ofentry into recession that this radical decision engenders.

The American consumer has taken the shock of the price rise rather well, as credit conditions have remained very favourable. Despite the increase in the price of new cars, dealers have, for example, maintained financing possibilities at 0% without contribution, which has supported demand. Credit conditions are a key argument for supporting consumption in the United States. The change in these favorable financing conditions leads some observers to anticipate a slowdown in demand. LRising prices are limiting demand, but rising rates could be even more damaging for US consumption.

Linflation has already caused the collapse of the power ofAmerican purchase:

Americans are cutting spending. The leisure sector is logically the first affected:

The rise in rates therefore comes at a time when the effects of theinflation begin to slow the level of American consumption. The Fed’s timing couldn’t be worse. The delay in raising rates will be very costly.

Indeed, rising interest rates now threaten toother sectors such asresidential real estate in the United States.

30-year mortgage rates have already soared to more than 5.3%, their highest since 2010:

Ld-indexaccess to individual propertycollapsed in a few weeks, to its lows of 2008:

In a context where mortgage refinancing is now impossible, the new credit conditions generated by the Fed’s change of course threaten to scollapsing demand in a real estate sector that was resisting at theinflation, until there.

Don the other hand, this rise in rates generates a rise (almost as violent asin 2020) European bond yields of the type Investment Grade”, which now exceed the peak reached during the pandemic:

Rate hikes, if they continue, threaten to bring theEurope and the United States in severe recession.

Lcollapse in demand that a possible recession would cause could bring down the prices of raw materials… provided that thesupply remains at levels comparable to those seen in previous periods of recession.

Chinese demand is also likely to impact the level ofoffers once the containment measures are lifted. The Chinese blockage is a risk for theglobal summer economic activity. On the other hand, Chinese demand will certainly pick up again this summer, as evidenced by the requests for new loans which have exceeded $1,000 billion over the past three months, a historically very high figure. Chinese consumers have the same behavior as Westerners during confinement: glued to their sofas, they prepare their future purchases!

In a context of reduced inventories, nothing indicates that the prices of raw materials will fall substantially: even in the event of a reduction in demand, it is the weakness of supply that dictates the level of prices.

And the level of supply is not about to change in geopolitical conditions that are changing day by day. The globalization of trade is gradually giving way to a mercantilist system where customs barriers, embargoes and protectionist measures limit trade. Access to resources is logically more complicated, and the level of supply is becoming increasingly tight.

In this environment, it makes sense to see thegold find buyers during its downturns, however weak they may be. Investors who buyphysical gold at this price level take out insurance against the risk ofmonetary policy error on the part of the Fed.

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