(Bloomberg) — For most of this year, rising inflation has been bad news for gold. Now the metal is given a shot in the arm.
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While bullion is often bought as a way to protect wealth when consumer prices rise, inflation this year has weighed on the metal as investors bet it will spur the Federal Reserve to scale back massive stimulus measures. But with the Fed determined to keep interest rates low while unemployment remains high, concerns about out-of-control inflation are boosting gold’s allure.
That was evident on Wednesday, when gold jumped to break out of a 15-month downtrend after data showed US consumer prices rose by the fastest since 1990. On Thursday, spot prices rose 0.9% before paring some of the gains.
Inflation is “not temporary,” said Nikki Schels, Head of Metals Strategy at MKS (Switzerland) SA. “It has injected some upward momentum. This is a change from the previous ‘think’ because the gradual threat of the Federal Reserve is out of reach.”
Gold’s recent rally shows that the market doesn’t expect the Fed – which announced last week the decreasing pace of bond buying – to do much to tackle inflation right now. This creates a Goldilocks environment for the metal, where inflation erodes bond yields controlled by stimulus measures, polishing the attractiveness of non-interest bearing assets like gold.
Bullion slid below $1,700 an ounce by mid-August – sending it down from a 2020 high to around 19% – amid concerns about Fed tightening. Prices rose 0.6% to $1,859.99 an ounce by 11:18 a.m. in New York, close to their highest since June.
Undoubtedly, the metal was trading just below the key resistance level ahead of Wednesday’s US inflation report and some of the gains may have been driven by technical buying. Attention now turns to any comments from Federal Reserve officials about how they will react to the publications.
Akash Doshi, analyst at Citigroup Inc. “We expect the Fed to signal a faster pace of decline” at next month’s meeting, and pricing short-term bond markets into faster rate hikes, “perhaps in reference to a temporary or only slow supply for gold in the winter.”
In contrast to prices, buying through ETFs remains muted, with holdings approaching their lowest levels since May 2020. More buying may be needed to keep the recent rally going.
Not only is the US seeing inflation accelerating. The data also shows that prints in China, Japan and Germany are climbing the fastest in decades, and there are signs that there is actually new demand for gold.
“German private investors have already responded to the recent high rates of inflation with rising demand. We are seeing a significant increase in interest in buying gold bullion,” said Alexander Zumpvi, senior trader at refiner Heraeus Metals Germany GmbH & Co.
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