Gold Under Pressure, Surging Energy Prices, and Equity Market Complacency

By Victor Sperandeo with the Curmudgeon

Gold Market Weakness:

Gold fell to a three-month low last week, with the December 2026 futures contract closing at $4,007.90 per troy ounce on Friday, October 23. The selloff was largely due to a brief liquidity squeeze and shifting interest rate expectations.

Victor was stopped out of his recommended gold futures trade at $4,025, limiting the loss. His separate long-term “Investment in Gold” position remains intact, with no stop-loss in place.

The decline highlights an important distinction between trading gold as a short-term market position and holding it as a long-term investment. The former is governed by price action and risk management; the latter reflects a broader assessment of monetary conditions and purchasing power.

Gold's weakness is particularly noteworthy against a backdrop of persistent inflation and sharply rising energy prices. The apparent contradiction, becomes easier to understand when one considers what financial markets are discounting: not simply today's inflation rate, but the expected path of interest rates, real yields, the U.S. dollar, and economic growth.

Since April 2020, the CPI-U has risen approximately 31%, equivalent to an annualized increase of roughly 4.3%, subject to confirmation against the latest index data. This represents a substantial cumulative erosion of purchasing power. But cumulative inflation is not the same as the current inflation rate, and gold does not automatically appreciate whenever consumer prices rise

Fed Policy Conundrum:

The problem confronting precious metals is how the Federal Reserve’s policy stance is being implemented—and, equally important, how markets interpret it. Rising oil and refined-product prices can be deflationary for the broader economy if the Fed does not accommodate the shock by expanding the money supply, as it did during the early 1970s. Fed member warnings about potentially higher interest rates are already affecting market psychology, weighing on both gold and U.S. Treasury securities.

Inflation is a monetary phenomenon: a sustained, general increase in prices, not simply a temporary price spike caused by a supply shortage. The Fed cannot produce more oil - it can only influence aggregate demand and monetary conditions. In 2008, when oil surged from approximately $96 to $147 per barrel, the Fed ultimately cut rates (due to the mortgage meltdown) rather than attempt to solve the oil supply shock through monetary tightening.

The highs across the precious metals complex occurred on January 28, 2026, when Kevin Warsh was reportedly identified as President Trump’s prospective Fed chairman. Warsh was widely viewed as an inflation hawk—a reasonable objective given the cumulative erosion of purchasing power since April 2020, as noted above.

The critical question is how Warsh intends to bring inflation under control? His stated emphasis on shrinking the Fed’s balance sheet and restraining money growth suggests an approach that need not rely exclusively on higher policy rates. Trump has repeatedly called for lower interest rates, creating a potential conflict between the administration’s financing and electoral priorities and the Fed’s inflation objectives.

Warsh's stated objective of shrinking the Fed's balance sheet has not yet translated into any reduction under his chairmanship. In fact, the opposite is the case!

· The Fed's balance sheet is now $6.754 trillion as of October 21, 2026 vs $6.735 trillion when Warsh became Fed chair on May 22, 2026. That's an increase of $20 billion!

· Both numbers are substantially above its pre-pandemic level of roughly $4.2 trillion.

Economic Impact of Higher Short-Term Rates and a Persistent Energy Shock:

Higher short-term interest rates have significant economic consequences. They depress bond prices, raise borrowing costs for households and businesses, constrain housing and auto sales, and increase interest expenses on more than $1.2 trillion in outstanding credit-card debt. Initially, however, equities may remain resilient even as bonds and precious metals weaken. Higher U.S. yields can attract foreign capital, strengthen the dollar, and put additional downward pressure on gold and silver. A stronger dollar also makes American exports less competitive.

The economic consequences of monetary restraint arrive with a lag. Slower money and credit growth can eventually weaken economic activity, reduce inflationary pressures, and ultimately pull interest rates lower. Paul Volcker’s October 1979 shift toward monetary-aggregate targeting provides a historical reference, although the subsequent evolution of rates and policy was more complicated than a simple reversal six months later.

Victor expects the economy to deteriorate sharply if the energy-price shock persists. As of Friday, October 23, 2026, crude oil is up 75.8% year to date, gasoline up 89.9%, and heating oil—closely associated with diesel costs—up 103%. These increases require verification against the relevant market-price series, but the economic fallout is clear: households and businesses cannot easily eliminate essential fuel consumption. They must pay more for energy and cut discretionary spending elsewhere. If oil and gas inventories continue to contract while prices rise, the squeeze on real purchasing power could intensify, weakening demand across the economy.

Outlook for Gold:

Victor's thesis is that gold and other precious metals remain vulnerable until the Fed changes course, recession risks become more evident, or deteriorating economic data force markets to reassess the outlook. Markets discount the future, not the past. Each CPI or PCE release largely reflects conditions that prevailed weeks earlier, while gold is responding to expectations about future monetary policy, the dollar, and economic activity over the months ahead.

The Curmudgeon believes that gold’s decline amid persistent sticky inflation and surging energy prices reflects the dominance of interest-rate expectations over inflation hedging. Higher oil and gas prices reinforce fears that the Fed will keep rates higher for longer, boosting real yields and the dollar—both headwinds for gold. The irony is that energy-driven inflation can ultimately weaken economic growth and force monetary easing, potentially reversing those pressures. It seems that higher real yields, dollar strength, and forced liquidation by hedge and futures funds matter more than inflation for the yellow metal.

Geopolitical Risks:

The geopolitical backdrop adds to the risks. Two major wars (Russia-Ukraine and U.S.-Iran) remain unresolved, European political tensions are mounting, and the energy shock threatens to compound existing economic pressures. Yet the S&P 500 remains only 2.45% below its all-time high, according to the figures cited here.

That disconnect is striking. The danger is not simply that economic and geopolitical risks are elevated; it is that equity-market valuations and investor positioning may be discounting too little of that risk.

Victor on U.S. Equity Markets:

When markets become complacent in the face of deteriorating fundamentals, the eventual adjustment can be abrupt and steep. The outlook is unusually fraught, and the apparent confidence embedded in equity prices deserves serious skepticism. Is the fear of missing out (FOMO) greater than that of a major stock market crash?

Curmudgeon's Market Comments:

1. The NYSE and NASDAQ Advance/Decline lines have been down for 10 consecutive weeks, while new lows have greatly outnumbered new highs during the same time period. Barron's reports these "New Highs/New Lows" for the past week: NYSE 157/379, Nasdaq 230/1000, NYSE American 6/88.

2. On Friday morning, Investech Research wrote:

"On Thursday, the S&P 500 fell -1.2%, and the S&P 500 Equal Weight Index rose +0.8%. The cap-weighted Index has fallen more than -1% while the equal weight rose by over +0.5% only two other times on record: April 14, 1999, and March 30, 2000. These were both near the top of the Tech Bubble, as investors became wary of internet-related stocks and rotated aggressively towards other areas of the market. This is another warning that the AI trade may be running out of steam and the market has entered an extremely high-risk period."

3. Edward Chancellor writes, “The economist Hyman Minsky applied the term ‘Ponzi finance’ to businesses that do not generate sufficient cash flows to meet their outgoings. Loss-making data center operators and AI frontier labs fit this description. Ponzi finance units, said Minsky, need rising valuations to raise additional capital. When valuations decline and the capital markets seize up, these shaky institutions collapse, causing losses to metastasize through the ⁠financial system. That is what happened in early 2000 after the credit markets lost confidence in the debt-fueled buildout of the information superhighway.”

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End Quote:

“It isn’t what you have, or who you are, or where you are, or what you are doing that makes you happy or unhappy. It is what you think about.” — Dale Carnegie

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Wishing you good health, success and good luck. Till next time………………………..

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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