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Inflation hints at potential moves for Gold and USD

Rising inflation has been the question many analysts, investors, and traders want answers to. Fortunately, these answers may come soon as Federal Reserve Chairman Jerome Powell is set to take the stage (virtually, of course) to address the future of US Monetary Policy post Coronavirus and, hopefully, answer the myriad of questions regarding the Fed's stance on inflation.​

Inflation rate in the United States over the past 10 years

It is the Federal Reserve's mandate to have inflation hover around 2%. However, with low inflation rates before the pandemic, Jerome Powell runs the risk of deflation due to US citizens not being employed.

Analysts predict that the Fed will release a new tool to increase inflation for a more extended period, increasing growth and pricing power. Rick Rieder, BlackRock's Global Chief Investment Officer of Fixed Income, stated that "the rate markets are anticipating the Fed is going to be dovish and willing to withstand inflation being higher for a more extended period.

Both the US Dollar Index and Gold gearing up for some potential moves on Inflation Policy

Currently, the Dollar Index sits just under 93 alongside Gold sitting at $1,943 an ounce. Both are suspectable to change in policies regarding inflation, with both gearing up for a move that would see Gold strengthen and the US Dollar weaken even further if Jerome Powell hints at pumping up inflation.

What's the link between Gold and inflation?

You always hear people say, "Gold is a safe haven" However, you may not know why, only that when stocks are selling off, Gold is picking up. What is one of the "haven" attributes that people state as a reason for buying gold?

As you can guess by the article – Gold and inflation go hand in hand. That is, as inflation increases, so do, theoretically, the price of Gold. We could go into the nitty-gritty side of things, take out our Econ 101 books, and talk about M1, M2, and M3 money supply, etc. However, what it boils down to is the supply and demand of money versus the supply and demand of Gold.

We all know that the Federal Reserve has been printing money as a drastic attempt to curve the Coronavirus's economic effects on the financial markets. However, this increase in the supply of money risks the devaluation of the US currency. As supply and demand states, an increase in supply, Ceteris Paribus, decrease the price. In this case, an increase in supply implies an increase in spending and demand for goods and services, incentivizing businesses to increase their prices – inflation!

If the price of goods and services increases, one US dollar buys less, therefore losing its value.

Gold is historically resilient against inflation

However, the supply of Gold is relatively set year over year, alleviating the problem money has as there is no central bank increasing/decreasing the supply. Since inflation does not affect Gold's value, the logic holds that people would instead hold Gold since it will not lose its value through periods of inflation, unlike the US dollar.

Inflation also affects many US dollar-denominated bonds. Bondholders get paid a set amount of interest. However, when inflation rises, the real yield the bondholders get paid gets diminished. Real yield is calculated by the nominal interest rate subtracting the inflation rate. In a 0% interest rate environment alongside rising inflation, sees real yields drop into the negatives. Negative real yields push investors away from the US dollar and into other positive or even neutral assets like you guessed it... Gold.

So why inflation?

With all these consequences regarding inflation – why is Jerome Powell insistent on maintaining their 2% guidance? Inflation is essentially a bi-product of stimulus that the Central bank and the government implement. Essentially, the government and central banks' goal is to get the economy moving by increasing employment and increasing the cash households have to spend throughout the economy. An increase in demand for goods and services incentives businesses to increase their prices, hence inflation.

However, there is a more critical reason why Jerome Powell wants to try and spur inflation – its that he does not want the opposite, deflation. Deflation is when prices of goods and services decrease. This is a destructive cycle for an economy to enter into as consumers get into the mindset – "Oh, prices are going to get cheaper in the future? I will just wait then." – However, that is a whole other topic.

For now, all eyes on the head of the money printer, the US Dollar, and Gold.

Anish Lal, an analyst here at BlackBull Markets did some excellent analysis on the GBP/USD ahead of today's speech. You can watch it here.

Central banks! Your week ahead

Central banks, central banks, central banks. This week ahead, central bankers from all around the world will conduct their annual Jackson hole meeting in which historically they discussed the macro-environment and, of course, monetary policy. However, due to Coronavirus restrictions, they cannot meet at Jackson Hole for the first time in 40 years. Like many meetings, they will be hosting a virtual meeting, available for the public to tune into. The main focus? “Navigating the Decade Ahead: Implications for Monetary Policy” – Or put simply, Monetary policy: Coronavirus edition. Here is your week ahead.

Wednesday, 26th August – U.S. Durable goods order

The Coronavirus continues to ravage the United States, with no visible end in sight. Currently, the United States recorded 48,163 new cases today, with 1,013 deaths. It is an awesome sight (the literal meaning of awesome, as in awe-some) as the U.S. stock market continues to rally to new highs, and billionaires see their wealth surge. The U.S. Durable Goods Order figure measures the cost of orders received by manufacturers for durable goods, including vehicles and appliances. As these are significant investments, they provide a good bearing on U.S. consumers (buying a new car when you just got laid off is unlikely). Therefore a higher than expected figure should boost U.S. equities and the U.S. dollar. The previous print was at a 7.6% increase in the cost of durable goods purchased, with consensus to see that number rise only 3.6% this month. 

Thursday, 27th August – Switzerland GDP Quarter over Quarter

With just under 40,000 confirmed cases, it is fair to say that Switzerland and many nations are continuing to grapple with the fight against the Coronavirus. However, just like with many other European countries, Switzerland is experiencing a resurgence of the virus. Switzerland recorded more than 300 new Coronavirus cases on Friday just before their quarterly update on Thursday. Analysts predict a print of -8.7% decline in GDP, from a 2.6% decline in the first quarter. 


Thursday 27th August – Jackson hole meeting, US GDP, Fed Jerome Powell Speech and Bank of Canada’s Governor Bailey Speech

Obviously not in Jackson hole due to the Coronavirus, Central banks from all around the world will host an online meeting discussing how monetary policy will be affected in the future from the Coronavirus pandemic. For the first time in 40 years, not only will the meeting not take place at Jackson Hole, but the conference will be available for the public to watch live. Furthermore, US GDP figures alongside both Fed Chairman Jerome Powell and Governor Macklem from Bank of Canada is set to speak. There is no doubt that this will be a stormy day in the markets.


Friday, 28th August -BoE  Governor Bailey speech

The United Kingdom continues to record new Coronavirus cases, logging over 1,041 new cases today. Investors and traders are wary of the possibility of negative rates in the future, with Deputy Governor Dave Ramsden stating that the BoE has “further headroom” to go with regards to monetary policy. The Bank of England currently holds interest rates at 0.1% and maintained its 745 Billion asset purchase target. They predict that the U.K. economy will not return to its pre-Covid levels until the end of 2021. 

 A big week ahead with monetary policy and forecasts from top Economists and Central bankers. Trader and Investors should be wary of the speeches ahead before placing any trades this week. 

We're starting something new this week! If you prefer to listen to the articles rather than reading them, we will slowly make them available on all platforms where podcasts are supported! For now, you can listen to the article here.

 Safe trading!