Surprisingly Low PPI and No Less Surprising Implications for Gold
All eyes on the PPI! Or at least that’s what many market participants thought today.
The PPI numbers were very low (-0.5% MoM), and well below expectations (0.1% MoM). This suggest that inflation is slowing down.
The likely interpretation was that the Fed is going to lower rates because of that and gold likely soared in the immediate aftermath based on it.
However, that’s simply not how it works.
One of the primary drivers of gold prices are real interest rates (lower real interest rates are bullish for gold and higher real interest rates are bearish for gold).
That’s nominal interest rates minus expected inflation (approximately). Lower than expected PPI is something indicating lower inflation, actually implying higher real interest rates. And this is bearish for gold.
If this is perplexing, please recall how rising inflation was bullish for gold. Now we saw the opposite – so it’s bearish for gold.
In the immediate term, though, markets can be (and are!) emotional and not logical, and can do all sorts of things. And it is often only after things get excessive that we see a turnaround.
Let’s check how similar situations in the PPI worked in the past.
Here’s the recent history of PPI statistics along with forecasts (from investing.com).
The red color in “Actual” column means that the PPI numbers were below expectations. Out of those, there were three cases, when they were significantly below those – and they were all at the current level: -0.5% MoM.
- Aug. 11, 2022
- Jan. 18, 2023
- Apr. 13, 2023 (today).
I marked those dates on the below gold chart.
Red, dashed lines mark the days when PPI was well below expectations. That was either right at the top, or shortly before the top.
It was a shorting opportunity in both previous cases, and it’s very likely a shorting opportunity today.
I know that it’s difficult to “believe” the above, but it’s not about a belief – it’s about looking at a table with statistics and seeing what happened when they were just like they are right now. That was how rallies ended, not started.
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Przemyslaw Radomski, CFA