The US dollar seems to be shrugging off inflation right now while gold is looking really weak. This is highly unusual. In fact, the opposite typically happens. When inflation increases, we expect to see weakness in the dollar and strength in precious metals, specifically gold.
Much of the world is worried about higher prices, so why are traders and investors flocking to the dollar and ignoring gold? There is plenty to worry about when everything costs more and demand remains insatiable as companies pass higher prices on to the consumer.
The US dollar is strong, gold is weak – what gives?
I won’t get into an economics lecture here, but suffice to say there is a severe imbalance between demand and supply and it doesn’t seem to be getting better. The 19-months-and-counting supply chain disruptions have created inflation in a vacuum. This is apparently why Fed Chair Jerome Powell calls inflation transitory. Call it transitory or temporary – it doesn’t matter. The effects of inflation are far-reaching.
We are seeing higher prices for appliances, groceries, used cars, homes and a wide array of services, all of which are siphoning away our wealth. A weaker dollar usually adds onto the woes, further eroding our buying power, but that hasn’t been the case. In fact, the US dollar has been very strong over the past few months, even with considerable weakness in the Consumer Price Index and Producer Price Index.
Because the US dollar has remained strong, investors have not flocked to hard currencies like gold and silver. Those metals are down for 2021 and continue to make lower lows on the chart.
Maybe inflation is going to be temporary and recede back towards a normal 2%. This is what the Fed said they expect to happen, but certainly the steadily rising prices across sectors has become a concern. If inflation remains with us longer than expected (or desired), the Fed will have some new policy decisions to make.
