Economy

New Expectations On Inflation, Interest Rates, and Gold

Inflation is up, high interest rates are here to stay, and gold is pulling demand from every corner of the market.

By The Insider

Wed Apr 10 •

This morning’s inflation report showed that inflation continues to be stubbornly high as March notched a +0.4% increase in prices month-over-month (MoM). Inflation’s standoff with the Fed has certainly intensified as probabilities for a summer rate hike were swept off the table; it appears the sentiment higher rates for longer has taken hold of 2024 markets. MoM figures for inflation have now been on the rise for 3 straight months (Jan-March) and we haven’t even reached summer which is statistically a high spending period for consumers.

Interest Rates

Following the inflation report, Fed minutes showed that FOMC members voted to keep language in the post-meeting statement that they wouldn’t be cutting rates until they “gained greater confidence” that inflation was moving lower. FOMC members also cited enhanced geopolitical tensions and rising energy prices as contributing risks to rising inflation.

Interest rate futures are now showing just a 66.31% chance of a rate cut at the Fed’s September meeting and nearly a 60% chance that current rates will remain unchanged throughout the summer. This is a major ‘kicking the can down the road’ event from what was expected just 10 days ago. To go further, market participants are slowing starting to place their bets that there will be no rate cut in 2024 at all, that probability stands at 12.9% which represents an 892% gain since April 3rd. If we’re being honest, we’re starting to lean in the direction of that camp as well.

Gold

So far gold is down a modest 0.61% to $2,348.10/ounce in today’s trading as the higher rates for longer sentiment reverberates through markets. This would mean that interest rate bearing assets (bonds) will continue to earn a higher yield than non-interest bearing assets like gold. However, this also means that the deterioration of the U.S. dollar (USD) is still in full swing so gold buyers are unlikely to be deterred by this new sentiment.

This seems to be something that Costco (COST) members are well aware of, yes, Costco. Costco members have been feasting on 24k 1-ounce gold bars for at least the last 2 quarters. It was reported by Costco CFO, Richard Galenti, that the company sold more than $100 million worth of gold in Q3 2023. The demand has been so blistering that Costco even has a 5 bar limit per customer installed to regulate demand.

The USD is definitely on the back foot even at the retail level as consumers can’t seem to get enough gold, Costco executive members are even receiving 2% cash back on gold purchases; Citigroup credit card members get an additional 2% back. Today Wells Fargo is now estimating that Costco is selling as much as $200 million worth of gold per month and that number is likely to grow after Costco executive members digest these new inflation and interest rate projections. Could this be the largest gold bull market of the 21st century?