The gold bulls are right – US inflation is on the up

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Is the rising gold price conveying a particular message about higher inflation ahead? Glancing over a number of economic charts (while I am waiting for a connecting flight at Sao Paulo airport), showed up rather interesting results, as reported below.

Firstly, the March ISM manufacturing and non-manufacturing PMI’s for prices indicate further upward pressure on prices.

A graph combining the manufacturing and services indices on a GDP-weighted basis, also points higher.

The GDP-weighted PMI for prices has historically been an excellent indicator of inflation. It would seem that the drop in the year-on-year headline CPI inflation rate from 2.7% in January to 2.2% in February was temporary phenomenon as the PMI indicator indicates inflation of closer to 3% over the next month or two.

However, when factoring in the absolute change in the oil price from a year ago, CPI could overshoot to a number in excess of 3%.

Back to the initial question about the gold price and inflation: Bullion leads the GDP-weighted PMI for prices by approximately two months and is currently indicating that this index measure could be heading higher still over the next few months.

The above “airport analysis” quite convincingly points to higher headline inflation. While this augers well for inflation hedges, the news for Treasuries is not good. Considering the relationship between the GDP-weighted PMI for prices and Treasury Notes, it looks likely that the 10-year yield could test long-term resistance at 4.5%.

That’s the way it looks from a buzzing Guarulhos Aeroporto, probably pointing to a strong Brazilian economy. But I will save my thoughts on Brazil and other South American countries for another day as I need to board my flight to San Diego.

Note: All the charts in this post are courtesy of Plexus Asset Management (based on data from I-Net Bridge).

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3 comments to The gold bulls are right – US inflation is on the up

  • SteveH

    Interesting post – tks. However, bear in mind that PMs are not simply an inflation hedge, but can be seen as a long-term safe haven irrespective of whether we face inflation or deflation. Or am I alone in my distrust of fiat paper?

  • @SteveH: You’re absolutely correct. My post only concentrates (quite narrowly) on one aspect, namely inflation.

  • BrianS

    Just thought you should know that the links in your emails no longer work in China now that Google has emigrated and the Great Firewall has intervened. Thank goodness one can still, however, read your posts directly from http://www.investmentpostcards.com

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