Is it hot in here,
or is it just the PPI numbers?
The Producer Price Index (PPI) came out this morning. It is a measure of the increase or decrease of prices manufacturers pay for their goods. We have seen some very high month-over-month readings of the PPI for over a year. Today’s number was no different. The PPI: all commodities (or headline) index came in at 0.7% on a month-over-month basis. On a year-over-year basis, we are looking at a 19.9% increase.
Core PPI, which excludes food and energy, also saw an increase of 0.6% month-over-month and 6.7% year-over-year.
All of these numbers indicate that tough decisions are coming for producers. They can either raise prices (which would set the CPI on fire) or they can eat the costs and see their profit margins tumble (as well as their stocks).
We are already starting to see some of the effects of producers passing on their costs to consumers. Yesterday’s post highlighted the press conference that Brian Deese gave concerning grocery prices. In his disjointed rant he pointed the finger at producers for raising costs on consumers. Today’s data release shows us that costs are rising because producers’ input costs have gone up. How long until Deese or other bureaucrats start throwing farmers or raw material miners under the bus for higher prices?
The PPI has gone up pretty dramatically, the CPI as well. The PCE index (the Fed’s preferred method of tracking inflation) has also been on the rise. So why did gold go down today? Why aren’t we seeing gold mining stocks rocket to the moon? Aren’t they suppose to flourish in times of high inflation?
Historically, gold mining stocks would rise when the market fell. Like Pavlov’s dogs, traders have been conditioned to believe this. But gold mining stocks aren’t contra-cyclical all the time. This is because the method for valuing a gold mining stock is tied directly to the price of gold. One of the most important factors to keep in mind when regarding gold is that it is not a true commodity. It gets lumped in with the other commodities because it is mined out of the ground. In truth, gold is a currency. It trades like a currency, acts as a currency, and is a store of wealth like a currency.
Other commodities are used in a manufacturing processes that enhances their value. Silver, copper, aluminum all have industrial or technology applications. Even the soft commodities like corn, wheat, sugar, and soybeans are used to manufacture other foods. Outside of goldschlager and jewelry, gold’s applications are limited.
This means gold is not driven by typical commodity factors like supply and demand. So what drives the price of gold? The most important factor that influences the gold price is the difference between inflation expectations and actual inflation. Just because inflation is high, doesn’t translate to higher gold prices. If traders can roughly predict future inflation rates, they can plan for them and all is well. It is when inflation becomes unpredictable that investors fear for their portfolios and turn to gold. This means gold is more dependent on emotional factors. This is why the Fed needs to hammer into everyone that this inflation is transitory. It calms investors fears when it appears the Fed has everything under control.
David Burns over at Live Better Now built an amazing model to try to track the gold price. He used all the right factors and then went on to refine it further. I’m a big fan of David’s work and I highly suggest you check out his blog. I reached out to him to see if he had updated his model recently. He told me that he is working on it and should have something new coming out in the next few weeks.
In addition to David’s model, I came across an old gold price model in “Stock Market Logic” by Norman Fosback. David and I are working together to try to recreate it and test it. When Mr Fosback built his gold price model, he stated that the model was tentative due to the short period of time available for testing it. Since he wrote Stock Market Logic in the 70s, that means we have nearly 50 more years’ worth of data to test it. I hope to have it built and tested soon so stay tuned.
The dual mandate is impossible, maximum employment and stable prices don't naturally occur together. So the fed has to pick one and its not stable prices. From their actions, they want higher inflation but without higher borrowing costs. So they are holding treasury yields by taking them as collateral at the very maximum value, and the point of this is to make selling them pointless. Effectively its a disguised sale that doesn't affect yields. I mean I can take cash from the Fed for my treasuries, -buy my inflation hedge-, and after the -transitory- period has finished redeem my treasury. This is all yield control and its the sop for the financial markets which could move yields. The real loss it to savers and it always will be that. This means the dollar should weaken but it isn't .. or maybe just not so far.