Inflation is back. So what does this mean for gold?
The consumer price index came in hotter than expected at 2.1%. A CNBC report said the number "pushes the economy toward a potential danger zone for inflation."
Analysts had expected January inflation to come in at 0.3, after being up by 0.1 the previous month. Instead, the December number was revised up to 0.2 and January came in at 0.5. As Peter Schiff pointed out in his podcast, if you multiply 0.5 by 12 months, it comes to 6% inflation per year.
"I think this is a trend. This is a horrible number."
Gold initially sold off on the news. It fell about $12. Why? Because everybody thinks rising inflation means the Fed will raise interest rates. But as Peter said, so what?
"It's not going to stop inflation. They would have to raise rates aggressively. They would have to move rates up faster than inflation is increasing, and they're not. Nominal rates are falling."
Keep in mind, an interest rate is nothing but a price. It's the price of money. When there is inflation, interest rates go up just like any other price. Contrary to popular belief, this is not bad for gold. Quite the opposite.
"But of course, this is all bullish for gold. Duh! Gold is an inflation hedge. That's what it's for!"
As gold began selling off, Peter tweeted the following:
"Gold sold off on the much higher than expected
#inflationnumbers. Traders still don't get it. Higher inflation is bullish for gold, especially since the Fed can't contain it with higher rates, as the rate required is higher than what Americas can afford to pay."
Low and behold, gold rallied. Peter later tweeted:
"Gold's $12 dollar selloff is now a $13 dollar rally. Maybe traders are finally figuring out that inflation is good for gold. Wait until they figure out that no matter how hot inflation gets, the Fed is powerless to put out the fire!"
Gold was up as much as $25 as investors fully digested the inflation news. It ultimately closed up $20 at just over $1,350 per ounce. Peter summed it up on his podcast:
"A $12 decline turned into a $25 rally. What is that showing? That as the idiot, morons, robotic sellers, when they see higher than expected inflation sell the dollar, people who use their brains are starting to think and actually come into the market and say, 'Wait a minute. I don't care what these algorithms or computer programs say. Inflation is good for gold.' Especially since the Fed is not going to be able to put out this fire no matter how hot these numbers get."
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