The Gold Bulls Are Right - US Inflation is On the Up

By: Prieur du Plessis | Fri, Apr 9, 2010
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Is the rising gold price conveying a particular message about higher inflation ahead? Glancing over a number of economic charts (while I am waiting for a connecting flight at Sao Paulo airport), showed up rather interesting results, as reported below.

Firstly, the March ISM manufacturing and non-manufacturing PMI's for prices indicate further upward pressure on prices.

Manufacturing and Non-Manufacturing PMI: Prices

A graph combining the manufacturing and services indices on a GDP-weighted basis, also points higher.

US GDP-Weighted PMI: Prices

The GDP-weighted PMI for prices has historically been an excellent indicator of inflation. It would seem that the drop in the year-on-year headline CPI inflation rate from 2.7% in January to 2.2% in February was temporary phenomenon as the PMI indicator indicates inflation of closer to 3% over the next month or two.

US CPI Percent Change Y/Y and US GDP-Weighted PMI Prices

However, when factoring in the absolute change in the oil price from a year ago, CPI could overshoot to a number in excess of 3%.

Oil Light Louisiana Sweet and USA CPI Percent Change Y/Y (lagged by one-month)

Back to the initial question about the gold price and inflation: Bullion leads the GDP-weighted PMI for prices by approximately two months and is currently indicating that this index measure could be heading higher still over the next few months.

US Dollar Gold Price and GDP-Weighted PMI prices

The above "airport analysis" quite convincingly points to higher headline inflation. While this augers well for inflation hedges, the news for Treasuries is not good. Considering the relationship between the GDP-weighted PMI for prices and Treasury Notes, it looks likely that the 10-year yield could test long-term resistance at 4.5%.

US GDP-Weighted PMI prices and US 10-Year Note Yield

That's the way it looks from a buzzing Guarulhos Aeroporto, probably pointing to a strong Brazilian economy. But I will save my thoughts on Brazil and other South American countries for another day as I need to board my flight to San Diego.

Note: All the charts in this post are courtesy of Plexus Asset Management (based on data from I-Net Bridge).

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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