Gold Breaks $1000 per ounce on Inflation Fear

U.S. Consumer Price Index rose in January, a report on Feb. 20 showed. Gold broke the 1000 dollar per ounce again not just because of inflation but also on rising skepticisms about the future of banking industry. Some news about the possibility of nationalizing of the U.S. banks in the late Friday also made the dollar weakened against its major counterparts.

U.S. CPI; the Source of Inflation/Deflation Matters

U.S. CPI fell as much as 1.0 percent in October when a 0.1 percent decline in the Core CPI, which excludes food and energy as volatile items, was even more impressive.

But what does it mean for the economy? The answer depends on the sources of inflation/deflation. Price pressures can ease by different reasons. Demand and cost are two main sources of changes in inflation headlines.

A significant decline in cost-structure, like the recent sharp drop in commodities prices, could result in an increase in output but at lower prices. But when prices are falling in response to lower demand, may be because consumers are pessimistic about the future and cutting back in spending, then falling output and rising unemployment could be more probable.

It is the first time since 1982 that the Core CPI declines, reflecting that the slowdown has not been limited to commodities prices but it is now the whole economy which faces the danger of deflation.

It means nothing but lower interest rates. Following charts show the market's reactions after the CPI report. U.S. dollar weakened against its major counterparts though some analysts believe that technical reasons could be also blamed for that excessive reaction.

Stocks, Treasuries, and Yen; Toward Understanding the Big-Picture

Rising inflation is not always negative for stock markets especially when the prospect is improving and other asset classes look more risky.

Last week showed that the CPI increased in Europe and North America but the possibility of a dipper slowdown in global economy noticeably eased concerns about the future of inflation. It may explain why equity indexes climbed, yields on Treasuries fell, gold and oil prices dropped and even carry-trading somewhat resumed.

Market sees the Fed less worried about inflation

Treasuries gained in the week that CPI rose 0.8 percent in July, the "fastest pace in 17 years". Even an unexpected rise in Industrial Production doesn't changed the view that the Fed expect that the slow growth could contain inflation. Futures contracts show that there is less than 25 percent chance for an interest rate rise by the end of the year.

• Fed's Stern expects that "the U.S. economy will probably continue on a path of slow growth, with unemployment rising and inflation easing", Bloomberg said.
• In another report, Chicago Fed President Charles Evans said the second half "likely be extremely sluggish" and inflation should ease "over the medium term".
• Dennis Lockhart, Federal Reserve Bank of Atlanta President, who is not a voting member until the next year, views "the current situation as reasonably balanced, with a great deal of uncertainty around both the downsides to growth and upsides to inflation".

Closing the positions when uncertainty increase, Taking 19 pip profit

I closed the positions, EURUSD and USDJPY, taking totally just 19 pip. There are reasons that increase uncertainty significantly:

• G-8 summit and the possibility of discussion on dollar weakness and currency intervention, at least in the words
• Bank of Japan will release its monthly report in less than one hour which is not expected to be positive for the Yen
• Although the US CPI and any other inflationary signs are generally negative to the stock market, but it makes people more convinced that the Fed will raise interest rate sooner.

Buying Yen and Euro, Betting on inflation

Half an hour is left to the US market close; I decided to bet on negative effects from inflation. 10 hours left to the German CPI and I am long on EURUSD at 1.5422. I have sold USDJPY at 107.88; I see the today high as the full price of recent rise in US Advanced Retail Sales.

Technically there is MACD divergence in both charts.

Global inflation in G-8, Local CPIs in calendar

Germany CPI is ahead, always supportive for the euro, but the G-8 finance ministers summit, which is scheduled this weekend, makes it difficult to comfortably selling dollar; Inflation is the main concern and it is likely to be some comments in favor of a stronger dollar. US CPI is also scheduled tomorrow.

Inflation fear can negatively affect sentiment in global stock markets, and this is what I have no doubt about it. Generally it is in favor of Yen and Swiss frank, the two main sources of carry trading.