The reported inflation numbers this past week should have sent gold up hundreds of dollars an ounce. Instead, gold fell about 0.5% on the week and closed near $4,145. Silver fell roughly 3%, closing around $56.85 after touching 55 and change during the week. Traders read hot inflation as bad for gold and silver, so they sold both. That selling is a buying chance, because the traders have it backwards.
The CPI numbers and the annualizing trick
September CPI rose 0.6% in one month. Annualized - multiplied by 12 - that is a 7.4% rate. The government never annualizes monthly inflation the way it annualizes GDP. When a quarter shows 0.5% GDP growth, they multiply by four and report 2%. They refuse to do the same with monthly inflation because they want the number to look as small as possible. So 0.6% in a month sounds mild, but repeated for a year it is 7.4%.
Year-over-year core CPI (excluding food and energy) came in at 3.7%. The monthly core rose 0.3%, which was 50% higher than expected, and year-over-year core hit 2.6% against a 2.5% forecast. That hotter-than-expected core is what triggered the sharp selloff in gold, silver, and bonds. Bonds have since recovered, but yields hit new highs on the news.
Inflation is rising under Trump, not falling
Republicans claim inflation was 9.1% under Biden and only 3% now, so Trump fixed it. That is false. Inflation is getting worse. For the first nine months of 2026, CPI is up 4% with three months still to go - the full year will likely hit 5%. For all of 2024, Biden's last full year, CPI rose 2.9% across all twelve months. In 2023 the full year was 3.4%. Inflation in just the first nine months of this year already beats Biden's third and fourth years.
It is still below 2022's roughly 6.5% and 2021's 7%, but it will pass them. CPI could rise more than 7% in 2027 and again in 2028. Under Biden, the CPI high came in his first year and fell every year after. Under Trump the pattern reverses - CPI gets worse every year, and over four years Trump's average CPI will likely top Biden's.
The irony: Biden's worst year, his first at 7%, came from the monetary and fiscal policy run under Trump in 2020. Trump planted the seeds of that price spike with his fiscal policy and the Fed's policy while he was in office. Biden inherited that from Trump, not the reverse. Biden's own policies were also inflationary and will add to the problem on Trump's watch, but the distinction matters - falling inflation rates are not falling prices. Households keep losing buying power even as politicians declare victory.
The deficit and the blame game
Trump made things worse with the "big, beautiful bill." After the midterms, when Republicans likely lose the House and Senate, deficits will grow larger. A Democratic Congress will pass even more inflationary bills, and Trump will sign them anyway - no gridlock. The 2024 election turned on inflation, the cost of living, and affordability. The 2028 election will be about the same thing, but worse, with a bigger affordability crisis.
The 2028 campaign becomes a blame game. Republicans will blame the Democratic Congress and still blame Biden; Democrats will blame Trump. Voters usually blame the party holding the White House, so Republicans get stuck with the blame. I expect a Democratic sweep in 2028 with radical-left democratic socialists and a Democratic Congress. Deficits keep expanding no matter which party controls Washington, and savers pay the bill through steady inflation.
Kevin Warsh is a dove in hawk's clothing
Markets wrongly see Fed chair Kevin Warsh as a tough inflation fighter, a Paul Volcker reborn. In five months as chair he has hiked rates just 25 basis points, and probably will not hike another 25 until December. The Fed's balance sheet is bigger today than when he took over. M2 money supply has grown near a 6% annualized rate during those five months. Those are the actions of a dove, not a hawk. Watch what he does, not what he says - he is all bark and no bite on inflation. The markets will figure this out.
Even if the Fed hikes two or three more times, it means nothing. Inflation is speeding up far faster than the Fed is raising rates. Hotter-than-expected inflation does not mean the Fed will fight harder; it means the Fed has already lost and inflation has won.
The dollar and the coming reversal
The dollar index holds near 102 because currency traders also misread the hot inflation. They think it means the Fed keeps hiking. Even if the Fed reaches 4.75% or 5% on Fed funds while inflation runs 7%, 8%, or 9%, it is meaningless. A crisis will stop the Fed from even following through on planned hikes. It will probably have to cut rates and launch massive quantitative easing - because of what is building in the bond and mortgage markets.
The $2 trillion mortgage problem
The 30-year fixed mortgage rate is now 7.5%. There are over $8 trillion in fixed-rate mortgages outstanding, with an average 25 years of duration left and an average coupon of 4.6%. Some borrowers have rates in the 3s or 2s; one of mine is 3.375%. These low rates are great for borrowers and a growing problem for lenders.
If you own a mortgage or mortgage-backed security paying 4.6% while the market is at 7.5%, you cannot sell at par. You take a deep discount. The unrealized mark-to-market losses held by mortgage lenders - mostly banks, plus insurance companies and funds - are about $2 trillion. Lenders are not marking these to market, but the losses are real. When mortgage rates rise another percent to 8.5%, the unrealized losses reach $3 trillion. This is without a single default.
For perspective, during the 2007-2010 global financial crisis, total write-downs on defaulted mortgages were about $450 billion. The current $2 trillion underwater position dwarfs that. And the two situations differ in a crucial way.
Why 2008 ended better for lenders
In the financial crisis, the Fed slashed rates to zero, so the mortgages that kept paying rose sharply in value. Only 10% of mortgages defaulted; 90% kept paying. Banks borrowed near zero from the Fed and collected 4%, 5%, 6%, 7% on those mortgages, producing an unrealized mark-to-market gain of about $1.3 trillion on the mortgage book. Actual default losses were about a third of that gain, so lenders came out ahead.
Today the opposite is happening. Lenders are losing money on 100% of their mortgages - on the current ones and on the ones that will default. The gains that saved them in 2008 are gone.
Defaults are coming through unaffordable rates
Defaults will rise because people cannot afford homes at today's rates, and rates will climb higher. Mortgage rates can easily reach 9% unless the Fed starts a massive QE program to buy mortgage-backed securities, which it might. At 9%, for a buyer to afford the same monthly payment he could have managed at a 3% rate, the home price has to fall by 50%. That shows how much mortgage rates drive housing. A jump from 3% to 9% radically changes what a household can afford, weakening housing demand, pressuring prices, and raising default risk. The risk that matters for investors is a policy reversal - the Fed forced to cut and ease when financial stress overwhelms its inflation fight. Buy gold and silver now, before investors understand what is coming.
