What is also very revealing is the manner in which the gold market has completely ignored the rate hike. The price action is telling us the continued rise in crude oil and its stubborn resistance to moving lower is feeding into gold which is moving higher on rising concerns over global inflationary pressures.
Just the other day it was Chile that was hiking rates as they too are battling the Kraken. The phenomenon is global and while policy makers in the US and some incredily dim-witted financial analysts here continue to pooh-pooh inflationary problems here at home, the truth is that the rise in energy prices has been the megaphone that keeps shouting, "The Kraken is coming".
I have been showing you price charts of both corn and gasoline as leading examples of both food and energy costs. Corn is such a key ingredient in livestock and poultry feed that its price level determines to a great extent what consumers will be paying for protein. Gasoline is the most visible evidence that consumers are spending more of their disposable income on filling their gas tanks. A trip to the grocery store is not only costing more to get there, it is also costing more when you leave with those bags of food.
The problem is the same as it always is during times of great bull markets in gold - REAL INTEREST RATES ARE NEGATIVE.
If you note the last sentence in the article below, you will notice that many in China feel that the rate of inflation is closer to 6% than the government target of 4%. Last time I checked, savings account in China were paying 3% for one year. Whether you take the government target or the higher rate, savers are still losing money in real terms.
The same holds true in many other countries around the globe as Central Banks cannot raise rates fast enough to get them into positive territory in real terms.
As long as real rates are negative, gold will continue to attract buying. It does not need any geopolitical turmoil to keep it elevated but it is also not hurting the cause of gold that there is so much unrest across MENA.
China central bank raises key interest rates
China raises key interest rates by a quarter percentage point as inflation fight continues
On Tuesday April 5, 2011, 7:36 am EDT
BEIJING (AP) -- China raised key interest rates Tuesday for the fourth time since October as it tries to dampen high inflation.