The Federal Reserve just tweaked how it thinks about inflation, and this could have a huge impact on gold and gold mining stocks. Speaking at Jackson Hole last week, Fed Chair Jerome Powell unveiled an adjustment in U.S. monetary policy that would allow inflation to average 2 percent over a period of time. The implication is that the Fed would let increases in consumer prices overshoot the 2 percent target rate, which the U.S. has rarely touched since 2012 (if we’re going by the headline consumer price index (CPI), which I’ll talk more about below). To support this re-framing of inflation, Powell says interest rates are likely to remain at near zero for some time longer, possibly for another five years. This policy change could be constructive for gold prices and, consequently, gold producers. This is something I’ve written and spoken about many times before. According to the World Gold Council (WGC), in years when the rate of annual inflation was greater than 3 percent, the price of gold increased 15 percent on average in nominal terms. That’s 10 percentage points higher than the increase that gold prices saw on average in years when inflation was 3 percent or lower. gold price has historically rallied in periods of high inflation As of Friday morning, spot gold was trading near $1,970 an ounce, down about $1,000 from its all-time high. There could be even greater upside potential if inflation is allowed to expand at a higher rate.
Earlier in the month I shared with you that manufacturing activity is improving around the world, as measured by the purchasing manager’s index (PMI). Factories in both China and the U.S., representing 40 percent of global economic output, are currently in expansion mode, with the official China PMI up for the past five straight months. Later this week we’ll see the PMI numbers for August, and I’m expecting them to have ticked up even higher. This type of activity is inflationary. New orders means greater demand for metals, energy and other commodities and raw materials, and this has the effect of pushing prices up.