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The CPI data for August came in hotter than expected, sparking the biggest market crash since the 2020 COVID lockdowns.
The price of gold also dropped on the news in anticipation of the Federal Reserve taking interest rates higher. Peter Schiff talked about the inflation news on his podcast and said investors need to get gold now before the entry point rises a lot higher. Because at some point the markets are going to figure the Fed can’t bend this inflation curve.
After the CPI data came out, stocks plunged. The Dow Jones fell by over 1,276 points. It was the seventh-biggest drop (based on points) in history. Other stock market indices charted similar declines. The NASDAQ fell 5.16%.
As Peter noted, gold also fell, but not nearly as much as stocks. The yellow metal was off about 1.3%. But gold did manage to close above $1,700, although it traded below that level interday.
The dollar index charted a huge swing, moving from 107.68 prior to the CPI data and then rallying to close at 109.9. Peter said it was one of the biggest moves in the dollar he’s seen.
“The markets were preparing for a softer CPI. Everybody was under the impression that inflation had peaked and that it was coming down, and that when we got validation that inflation was coming down by the August CPI, that would take a lot of pressure off the Fed — that it wouldn’t have to raise rates as much because the inflation problem was solved. That’s one of the reasons the dollar sold off. It’s one of the reasons gold and silver rallied. In fact, it’s one of the reasons the stock market had been rallying, because the Fed was going to be taken out of the game. Maybe not completely sidelined, but at least it was going to tone down its rhetoric and maybe not raise rates as much as people thought. But now that we got this hotter than expected number, people think the Fed is going to raise rates more than they thought.”
Peter said the markets still don’t understand that even if the Fed hikes by 100 basis points at the September meeting, it will not bend the inflation curve.
“I don’t know why everybody continues to be surprised when the inflation numbers come out worse than expected. They assume that what the Fed is doing is going to work. It’s not going to work. The people who think it is don’t understand the nature of the problem.”
The numbers indicate that Fed can’t win this inflation fight. Part of the solution is positive real interest rates. If you look at all of the Fed tightening cycles since 1973, the central bank has never stopped tightening before the Fed funds rate was higher than the CPI.
“As long as we have interest rates below the inflation rate, even if they’re higher, they’re still negative, and negative interest rates put upward pressure on inflation. You can’t fight inflation with negative interest rates. It’s like saying, ‘I’m going to fight this fire by pouring gasoline on it. It’s just that I’m only going to pour a little bit of gasoline, not as much gasoline as I was pouring on before.’”
Clearly, the fire will keep getting bigger.
But the markets don’t seem to get this. Otherwise, they wouldn’t be selling gold into rising inflation.
“After all, gold is an inflation hedge. And if investors expect more inflation, they’re going to hedge with gold. And if you expect inflation to continue, gold is going to discount that future inflation into the present, and it’s going to be reflected in the current price of gold.”
The question is when will those expectations change?
“How many more months can the CPI come out hotter than expected and investors still believe that inflation is going to go away? How many more rate hikes do we need that are ineffective at reducing inflation before investors figure out that it’s not going to work? And of course, how many rate hikes will the Fed be able to get away with without crashing the stock market? Without crashing the real estate market? Without causing a financial crisis?”
And if the Fed keeps pushing that envelope until it rips, will the Fed continue to hike rates? Or will the Fed pivot when it anticipates or acknowledges the next crisis?
“As long as it pivots at all, that means inflation is going to run out of control. And if it is, the dollar needs to go way down and gold needs to go way up.”
Peter said he doesn’t personally think the Fed will get away with very many more rate hikes.
He pointed out that gold didn’t fall all that much given the plunge in stocks. In fact, gold didn’t even close on the lows.
“Maybe that’s some indication that investors are beginning to question that narrative. They haven’t completely figured it out yet, but some of the selling may in fact have been exhausted.”
Peter said at some point there will be divergence and gold will start rising when inflation is worse than expected. The dollar will fall. And the long end of the bond market will start getting beat up.
“If you’re waiting for a sign, some indication that everything is about to blow up, that’s what you should look for. You should look for a reaction in the bond market and the currency market and the precious metals market that is opposite of the reaction that we’ve been having.”
Peter said you shouldn’t wait for that signal to position yourself.
“I think it’s possible that by the time we get that signal, it could be a much worse entry position than the one we have right now. Because the markets can start anticipating that signal before we actually get it. I know it’s going to happen eventually. But when it does happen, that’s when you’ll know the end has finally begun. But before it does, take advantage of other investors’ misunderstanding of what’s going on by increasing your exposure to both gold and silver, and gold and silver mining stocks.”
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