Friday, January 28

How Powell’s Comments on Inflation Deflated Gold

By: Neelesh Raj

During an online conference hosted by the South African Reserve Bank, Federal
Reserve Chairman Jerome Powell stated that supply-chain issues would eventually be resolved.
He also claimed that the current stagflation caused by the supply chain bottleneck would be
scaled back, bringing inflation back to the Fed’s current goal of two percent per year. The impact
of his statement can be seen on the securities market, causing the price of gold to drop by
nearly $30 per ounce, bringing the gold price below $1800 once again.

Historically speaking, investors usually would invest in government bonds and bullion
(such as gold) when they believe in economic instability within the equities market. This would
decrease the money invested into equities, leading to a form of stagflation. Analysts usually
measure stagflation using something known as the Misery Index, which takes into account the
unemployment rate and the inflation rate. Unlike the Phillips Curve, which we have studied in
Economics (which also involves knowing the inflation and unemployment rates). The Misery
index evaluates the economy’s health by taking the sum of these two quantities, with higher
values indicating a higher Index score. According to Powell, markets see inflation as nothing
more than a transitory period naturally occurring due to COVID-19 logistical issues. However,
we can observe that companies worldwide face an energy crisis, supply-chain bottlenecks, and
labor market shortage. For example, multinational technology giant Apple forecasted reduced
production of 10 million i13 I phone handsets earlier this year due to the microchips shortage
both from Broadcom and TI, the most necessary component for their newest flagship device.
That news resulted in their share price drop on October 13 to $139.6 before bouncing back to
the current 4148.69. Labor shortage directly impacted Vanderbilt students resulting in the lack
of workers in the dining halls, leading to a decrease in the availability and quality of Vanderbilt food. This is why investors would instead place their money into safer, i.e., Government bonds or bullion rather than in the stock market.

However, suppose the government wants to encourage money in financial markets by
limiting the growth of money supply by reducing the bank’s buyback on monthly bond
purchases. In that case, institutional and private investors should invest more into equities. As a
result, increased retail sales of consumer and durable goods would be supported by sustained
growth in transportation and manufacturing, reduced unemployment, and improved wages.

This situation has a connection to Vanderbilt, as Powell’s statement can support the
claim that recent graduates of Vanderbilt’s undergraduate and graduate schools are more likely
to have better job opportunities and offers in the coming year if the growth forecasted comes to
fruition. This effort, along with the mobilization of vaccination efforts in America, will reduce the
strain on the federal reserve to subside working-class Americans’ lifestyles and encourage them
to reenter the job market, contributing to the alleviation of labor shortages across various
industries, such as Vanderbilt dining.


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