inflation decreases, increasing the chance of a pivot

US inflation fell in October. Monetary depreciation reached a low of 3% in June this year, but has risen again to 3.7% since July (see graph below). The latest figure from October indicates that inflation is falling again. At the same time, the US labor market is weakening.

Source: Tradingeconomics.com

At the beginning of this month it emerged that the labor market performed below expectations in October. Analysts expected an increase of 180,000 jobs, but only 150,000 were added. Furthermore, unemployment in the US rose to 3.9%, while analysts had expected 3.8%.

Both figures indicate that the FED may reach a so-called pivot more quickly. If the labor market weakens further and inflation falls further or remains the same, the chance of lower interest rates increases. America can use this well as the interest on the national debt consumes an increasing share of the budget.

In the eurozone, inflation fell to 2.9% in October. In September inflation was still 4.3%. Core inflation, the figure the ECB looks at, fell to 4.2% from 4.5% in September. The economy shrank by 0.1% in the third quarter, while there was growth of 0.2% in the second quarter.

Unemployment in the eurozone is currently 6.5%. Based on these figures, the market currently assumes that the ECB will have cut interest rates by 100 points (1%) by December 2024.

Gold benefits, but silver rose much faster

The gold price could benefit from these figures, because possible future lower interest rates are positive for gold. The US dollar also weakened. The Dollar Index fell from 105 to 103 points this week. Gold in US dollars rose 2.2%. In euros the increase was just 0.3%.

Silver did much better. The silver price rose this week in US dollars, by 6.6%. Silver closed at $23.72 per troy ounce. Measured in euros, the profit was 4.6%. This brought the price to the highest level since September of this year.

But more is needed to drive the gold price, in US dollars, towards a new record. In particular, a significant economic contraction could force the FED to cut interest rates substantially. And then gold can attack the record of $2075 per troy ounce. But this does not seem to be an issue in the short term.

The gold-silver ratio moved from 1:87 to 1:83 this week. In terms of historical data, still far in favor of silver when we look at undervaluation. The average ratio in recent years has been around 1:59. The ratio has moved between 1:30 (2011) and 1:125 (2020) in the last 20 years.

Below is a graph of the ratio in the last 12 months:

Source: Goldprice.org

Agenda
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