Inflation is currently running at 7.9% and new forces have emerged over the last month that will exponentially magnify the rate at which inflation continues to grow. In fact, it could challenge the highest level we have seen since 1979. If this plays out, we would see gold move exponentially higher.
The main factor that is driving gold well above $1900 in the last three trading days is inflation with a twist. The spin magnifies the current level of inflation and speeds up the level at which it is growing, and speeds up the timeline for achieving it. Inflation started skyrocketing long before Russia invaded Ukraine. It has been running rampant this year well above levels seen in the last 40 years.
The facts speak for themselves; in 2019, inflation fluctuated between the minimum of 1.5% and the maximum observed in December with 2.3%. In 2020, inflation ranged from 2.5% to a low of 1%. However, 2021 was the beginning of a cascading effect with consecutive inflation spikes throughout the year. While the average inflation rate in 2021 was 4.7%, it contained five months in which inflation was above 5% and two months in which inflation was as high as 6.2% and 6 .8%. While we only have two months left for inflation pressures this year, they are surprisingly high. The CPI for January was 7.5% year-on-year. In February, the CPI inflation index swept past 40-year highs and stood at 7.9%. The government’s report on March inflation figures will not be available or released until April 12.
The twist: how the Russian invasion of Ukraine has affected imports to the European Union
Analysts, myself included, have written a lot about the root causes of inflation pressures and what differentiates inflation based on black swan events like the pandemic, but for the first time since we’ve seen inflation actually rise, it’s there has been a new additional force that could trigger the rate at which inflationary pressures are currently growing. I am referring directly to the additional inflationary pressure that will be a direct result of the Russian invasion of Ukraine.
The world’s most important food export is still grain. During the first ten months of 2021, Russia exported $388.4 billion worth of grain, which was an increase of 42.8% year over year. The main recipients were China, Germany and the Netherlands. According to the International Food Policy Research Institute, the collective exports of Russia and Ukraine account for 12% of all food calories traded in the world as of March 11, 2022. Ukraine is the second largest grain supplier to the Union European. Its main export to the EU is barley and wheat. More alarming is that Russia is a world leader in the export of wheat and ranks as one of the main exporters of world sales of crude oil, refined petroleum oils and coal.
These are the facts as they have existed from 2021 to today. However, in November 2021, satellite images first the global smart community that Russian troops had begun to accumulate on the board of Ukraine. Russia has denied any plans to invade Ukraine, with the vast majority of political and military analysts saying Russia is unlikely to start a full-scale invasion. All that changed exactly one month ago when on February 24, when Russia officially invaded Ukraine. This created another black swan event that will have a huge impact on the cost of goods and services around the world, driving current inflation levels much higher.
In addition to the geopolitical tension this war has heightened, its effect of reducing exports of necessary goods and services by Russia and Ukraine will make the old supply chain bottleneck look like a walk in the park. The consequences are dire and there are no solutions as long as Russia continues to invade Ukraine and the war continues to escalate. This is why we have seen gold start to react dynamically by moving to higher prices. This month, gold traded $10 below the record set in August 2020. I am one of many analysts predicting that the price of gold will hit a new all-time high. In yesterday’s article I put numbers on where I think gold could go based on technical studies.
However, the studies are based on extremely strong fundamental events that will certainly affect inflation, but could very likely push it to the highest levels we have on record, with the exception of the 23.70% inflation rate in June 1920. The current record level of inflation occurred during March and April 1980 when inflation reached 14.6%. It is the year 1980 with which reporters and analysts have been comparing current inflation levels. With inflation currently running at 7.9%, which is a 40-year high based on fundamental pressures driving inflation up, we could easily reach and exceed 15% inflation if left unchecked.
As of 6:30 p.m. EDT, gold futures based on the April contract are currently at $1,958.60, and based on the June contract, which will become the busiest contract month next week. , is currently set at $1963.90.
Gold will continue to gain in value as long as inflation continues to rise. That is why we focus on the current level of inflation and that, all other things being equal, as long as the war continues and Ukraine, it is virtually impossible for us to see inflationary pressures diminish around the world. As such, it is virtually impossible for gold not to trade at all new all-time highs.
For those who want more information, just use this link.
Wishing you good business as always,
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has gone to great lengths to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange of commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage arising from the use of this publication.