Cash is king as meltdown in financial markets continues to drive gold lower

The selling pressure continued as US equities continued their dramatic fall. On March 28, the S&P 500 hit an intra-week high of 4635. What followed was five straight weeks of significantly lower values. If today’s selling pressure is indicative of the week ahead, we could certainly see US equities decline over the past six consecutive weeks. Over this short period, the S&P 500 lost almost 14% in value (-13.89%). Today alone, the S&P 500 lost 3.20%. However, it was the NASDAQ composite that saw the largest percentage decline below 12,000. After factoring in today’s drop of 521.41 points, the tech-heavy index closed at 11,623.25.

Gold prices have also seen a sharp price decline and as of 4:55 p.m. EDT, the most active June 2022 futures contract is down $29.20 or 1.55% and set at 1853.40. $. The only precious metal to increase in value on this day is palladium. Palladium futures gained $50.30, a net gain of 2.49%, and are currently pegged at $2,073.50.

The dramatic sell-off in financial markets and precious metals is a response to both the Federal Reserve’s recent action and the Fed’s outlook for the next two FOMC meetings. The Federal Reserve raised the federal funds rate by half a percent at this month’s FOMC meeting and signaled that it would likely continue the trend of ½ percent rate hikes at the FOMC meetings this month. June and July.

This led to the recent sharp rise in US Treasury yields, with the 10-year Treasury yield trading today at a high of 3.2% before stabilizing at 3.039%. Higher US debt yields have strongly encouraged the US dollar to appreciate against other currencies, which has lowered gold and silver prices.

The sharp decline in US stocks and precious metals over the past month can be directly linked to soaring inflation. This week, on May 11, the US Bureau of Labor Statistics will release the April CPI. Currently, the consumer price index is at 8.5%, the highest reading since January 1982. Spiraling inflation is behind recent rate hikes by the Federal Reserve as it attempts to slow economic expansion to reduce inflationary pressures. .

Forecasts for April’s CPI differ, with some analysts predicting a plateau for a peak in inflationary pressures and others expecting inflation to continue to pick up. According to Forbes, “the April CPI estimate will be announced on Wednesday before the stock market opens. The overall rate is expected to drop from 8.5% to 8.1%. To reach 8.1%, the month-to-month inflation rate will need to decline from 2.3% in January, 2.6% in February and 3.8% in March to a maximum of 1.25% to reach the expected number. »

However, inflation forecasts published today in Bloomberg Markets indicate that, according to a New York Fed survey, “longer-term inflation expectations are rising.” In an article written by Alexandre Tanzi, he reported that “U.S. consumers expect inflation three years from now to be higher than a month ago, a potentially worrying sign for the Federal Reserve as the central bank attempts to to keep longer-term expectations anchored”.

Whether inflation levels continue to rise to higher levels as they have throughout this year or begin to peak, the likelihood that extremely high levels of inflation will continue to be persistent and not transitory as the Federal Reserve had maintained until recently with Chairman Powell and other Fed MPs say longer-term inflation expectations remain well anchored.

While the Federal Reserve’s action on big rate hikes will most certainly lead to economic contraction, the Fed cannot control supply chain issues or the war in Ukraine, which have been the main forces that have drives up inflation.

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Wishing you as always good exchanges,

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