Is Headline CPI Inflation “Fake News”?

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 this 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 reframing 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.

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.

But Are We Even Measuring Inflation Accurately?

Besides signaling possible gains in the price of gold, Powell’s speech raises the question yet again if we’re even measuring inflation accurately in the U.S. As you may be aware, the official CPI is controversial among some investors, academics and economists for a number of reasons. Many people believe that it doesn’t reflect the real changes in prices they’re seeing every day.

For the month of July, for instance, the Bureau of Labor Statistics (BLS) reported that prices for all urban consumers rose only 1 percent year-over-year. Even when we remove core items like food and energy, the increase was a paltry 1.6 percent.

Really? Everything, it seems, is up right now. Stock indices are at record highs. With bond yields at record lows, even before inflation takes its cut, investors are chasing dividend-paying stocks. Gas prices have creeped up to pre-pandemic highs. Nearly every metropolitan area (96 percent) in the U.S. saw an annual increase in home prices in the second quarter, according to the National Association of Realtors (NAR), with the median price climbing 4.2 percent to $291,300.

Here in San Antonio, where the cost of living is typically lower than the national average, median home prices rose 9 percent in July to $260,700. The average price exceeded $300,000 in July, up 10 percent from the same month in 2019.

And look at lumber prices. From the start of the year, the wood has soared 190 percent as lumber demand has surged on an increase in home renovations during coronavirus lockdowns and supply was constrained by closed mills. Today, lumber hit a new record high of $916.30 per board foot, almost three times higher than the 10-year average of $338. This has helped support share prices of home improvement retailers like Home Depot, up 33 percent year-to-date, and Lowe’s, up 40 percent.

So is there a more accurate gauge of inflation than the CPI? I’m a fan of the site Shadow Government Statistics, or ShadowStats, which provides, among other things, alternate inflation data that uses the 1980 CPI methodology. For what it’s worth, if we use this definition of inflation, consumer prices actually rose 8.6 percent in July, not 1 percent, a not insignificant difference of 760 basis points.

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Ohio Fund Adds Gold to Hedge Against Inflation

If you believe this—if you believe the headline CPI understates the impact of inflation—why wouldn’t you invest in gold?

I don’t think it’s a coincidence that institutional investors are starting to add gold to their portfolios at this time. This week, we learned that the $16 billion Ohio Police & Fire Fund will be taking a 5 percent position in the yellow metal as a hedge against inflation.  

If you recall, Texas became the first state in the U.S. to have its own gold depository when it opened the Texas Bullion Depository two years ago. At the time, I said that it might encourage other states to follow suit, and I’m pleased to see Ohio money managers realize that a 5 percent to 10 percent allocation to the precious metal is wise and prudent.

Improved Manufacturing Activity Is Also Inflationary

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. Next 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.

This is why we’ve seen the copper price rise steadily off its pandemic low. Sometimes referred to as “Doctor Copper” for its role as an economic bellwether, the red metal is universally used in electrical wiring, construction, industrial machinery and more.   

It’s not just asset prices that drive up inflation, of course. There’s also wage growth, and in many economies that produce much of the world’s goods, especially those in Asia, wages are on the rise.

Of the countries featured above, China remains the most expensive to manufacture goods based on a monthly base salary of $493, but according to CLSA, Indonesia and Thailand both saw relatively high wage increases in 2019. You can see why many companies, including Apple, Samsung, Nintendo and GoPro, are moving out of China and relocating to Vietnam and other lower-wage economies.

Have a blessed weekend! And take our poll about if you believe the headline CPI is an accurate measure of inflation in the U.S.  Go to


Gold Market

This week spot gold closed at $1,964.83, up $24.35 per ounce, or 1.25 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.98 percent. The S&P/TSX Venture Index came in up 2.05 percent. The U.S. Trade-Weighted Dollar fell 1.04 percent.

Date Event Survey Actual Prior
Aug-25 Conf. Board Consumer Confidence 93.0 84.8 91.7
Aug-25 New Home Sales 790k 901k 791k
Aug-26 Hong Kong Exports YoY -3.0% -3.0% -1.3%
Aug-26 Durable Goods Orders 4.8% 11.2% 7.7%
Aug-27 GDP Annualized QoQ -32.5% -31.7% -32.9%
Aug-27 Initial Jobless Claims 1000k 1006k 1104k
Aug-31 Germany CPI YoY 0.1% -0.1%
Aug-31 Caixin China PMI Mfg 52.5 52.8
Sep-1 Eurozone CPI Core YoY 0.9% 1.2%
Sep-1 ISM Manufacturing 54.5 54.2
Sep-2 ADP Employment Change 1250k 167k
Sep-2 Durable Goods Orders 11.2% 11.2%
Sep-3 Initial Jobless Claims 965k 1006k
Sep-4 Change in Nonfarm Payrolls 1518k 1763k


  • The best performing precious metal for the week was silver, up 2.66 percent as money managers raised their bullish positions to a five-week high in the futures market this past week. Gold and silver recovered on Friday after a volatile Thursday. Traders appear to be following the “inflation trade” that was reignited following Fed Chairman Jerome Powell’s dovish speech on monetary policy. The Fed is targeting inflation that averages 2 percent over time and won’t hesitate to act if consumer prices rise considerably above its goals. As seen in the chart below, gold has gained over the last 12 months as both the dollar and the yield on five-year Treasuries have declined.

  • The biggest Indian jeweler IPO could be in the works. Kalyan Jewellers India Ltd., a Warburg Pincus-backed company, said it plans to raise $235 million or 17.5 billion rupees. The company is remaining bullish on Indian gold jewelry demand even in the face of weakened consumption during the pandemic. Kalyan said about 10 million weddings take place annually in India, which creates demand for as much as 400 tons of gold in the form of jewelry. Turkey is set for a record year of gold output that the country’s central bank will likely buy in its entirety. Production is set to increase 16 percent to 44 tons, according to the Turkey’s Gold Miners Association. Bloomberg notes that legislation introduced in 2017 gives the central bank the right of first refusal to buy gold mined locally at prevailing market prices.
  • Sibanye Stillwater said it will pay an interim dividend of $79 million, its first in three years, after a surge in precious metal prices, reports Bloomberg. CEO Neal Froneman said “with restriction on economic activity relaxing globally, the outlook for precious metals prices is constructive.” Shandong Gold reported net income for the first half of 2020 of 1.15 billion yuan – a whopping 98 percent increase year-over-year. Revenue for the first six months was 33.1 billion yuan.


  • The worst performing precious metal for the week was platinum, but still up 1.14 percent. Despite hedge fund managers cutting their bullish positioning to a six-week low, investors have been adding significantly to the exchange listed physical platinum ETFs over the course of the summer months. Gold fell on Wednesday after the surge in U.S. new home sales and decreased U.S.-China trade tensions outweighed inflation expectations, reports Bloomberg. The metal had a wild trading day on Thursday with prices $30 higher at one point and down $25 at other, reports Kitco, after Fed Chairman Powell’s comment about letting inflation run hotter, however the metal shortly slumped on recognition the Fed provided no credible plan on how they would lift inflation.
  • India’s gold jewelry and retail investment demand will slump to just 350 to 400 tons in fiscal year 2021, according to UBS Group. The second-largest gold consuming nation is likely facing its worst ever recession due to the pandemic and consumption is unlikely to record to normal levels anytime soon. The UBS report says India consumed 633 tons in 2020.
  • De Beers, the world’s top diamond producer, has decided to cut the price of its gems in hopes of sparking sales amid the paralyzed industry. Bloomberg reports that De Beers cut the price of rough diamonds bigger than one carat, a size that would usually yield a polished gem of about 0.3 carat size. Largest stones had price cuts of almost 10 percent. Russian diamond miner Alrosa PJSC is also cutting prices, but the billing system has changed so buyers can’t tell which stones are discounted or by how much.


  • Nomad Royalty is buying Coral Gold Resources in a deal valued at $45.8 million. Nomad also announced this week that it is acquiring a cash flowing royalty on the Moss gold mine in Arizona through the acquisition of Valkyrie Royalty Inc for $7.6 million. Brixton Metals Corp is acquiring a 100 percent interest in the Metla mineral claim group from Stuhini Exploration in Canada – expanding its existing Thorn project.
  • Mint Innovation, a New Zealand start-up company, plans to open a refinery in the U.K. for extracting precious metals from electronic waste. Bloomberg reports this would be the world’s first commercial operation to use bacteria rather than cyanide-based processes to recycle precious metals from electronics. A United Nations report found that at least $10 billion of gold, platinum and others were thrown away every year in e-waste.
  • Nicholas Johnson, portfolio manager at Pacific Management Co., says gold still has room to run. “Despite the recent run-up in gold prices, we believe gold remains attractively valued – one might even say cheap – in the context of historically low real interest rates.” Johnson says that with yields on 10-year Treasuries below zero, it strengthens the value on non-yielding bullion.


  • Russian gold miner Polymetal said operations at its hub in Omolon have been suspended temporarily due to the virus as one-third of workers tested positive. This serves as a reminder that the pandemic remains a threat globally. Despite that negative headline, the company reported H1 revenue up 21 percent and is on track to meet its 2020 production guidance of 1.5 million ounces.
  • Ghana’s former President John Dramani Mahama said he will reverse the establishment of the country’s gold royalty fund if he regains power in the country’s December election. Mahama said the fund is a “very shady deal” and the fund would benefit just a few people.
  • More businesses are facing the grim reality of having to let employees go during the pandemic. MGM Resorts is laying off 18,000 of its 62,000 furloughed workers.  Coca-Cola is offering buyouts to 4,000 employees and noted layoffs could be coming. Capital One Financial is cutting borrowing limits on credit cards, limiting its exposure as the U.S. reduces support for millions of unemployed Americans. Five months after Peru reported its first Covid-19 it overtook Belgium as the nation with the most deaths.  Their Deputy Health Minister noted the number of deaths is probably closer to 50,000 versus the official tally of 25,648 on Thursday.

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Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 3.30 percent. The S&P 500 Stock Index rose 3.62 percent, while the Nasdaq Composite climbed 3.82 percent. The Russell 2000 small capitalization index gained 0.90 percent this week.
  • The Hang Seng Composite gained 2.54 percent this week; while Taiwan was up 2.96 and the KOSPI rose 3.50 percent.
  • The 10-year Treasury bond yield rose 7 basis points to 0.724 percent.

August 28, 2020

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors