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LAWRIE WILLIAMS: Inflation fears boosting gold price?

Precious metals prices, and gold in particular, have been trading higher in the U.S. due to fears that increasing inflationary oressures could force the U.S. Federal Reserve (the Fed) to raise interest rates sooner than it appeared to have forecast at its latest FOMC meeting.  The Fed has denied that this will be the case, but such fears have lingered and seem to have initiated an upwards surge in precious metals prices regardless.  The big question is will this apparent change in sentiment towards gold in the investment public and funds sector continue and raise prices higher still in the weeks and months ahead?

The Fed‘s views and latest government-issued data, would seem to fly in the face of consumer-experienced reality.  Consumer experience for now seems to be indicating inflation rises well above the Fed’s 2% average target level with consumer prices seemingly rising across the board.  However the Fed tends to be extremely cautious in its approach and only tends to adjust its interest rate policy on the basis of the government-released data which takes additional information into account, rather than relying on consumer perceptions, and as long as this stays roughly within target levels the Fed is likely to stand firm on its interest rate policy as it made clear in the aftermath of last week’s FOMC meeting.

For the time being at least, Fed chair Jay Powell is sticking to his forecast of the continued implementation of low to technically negative interest rates , coupled with a continuation of the current Quantitative Easing programme  for the foreseeable future.  The Fed has an inflation target of an average of around 2%, and given that it has been undershooting this target for some time now, a period of above 2% inflation, as long as it doesn’t get out of hand, might even be welcome in bringing overall average inflation up to the 2% target rate.

Even so, many economic analysts and commentators view things differently and are talking more serious inflation levels.  Some are even predicting hyper-inflation ahead, although what they are referring to here in the American context is perhaps inflation at only a fraction of the recent hyperinflation rate than the thousands of percent seen recently in Zimbabwe.

Those suggesting higher inflation rates, and a possible Fed interest rate rise on the back of this, would seem to have had their position on this confirmed by a recent statement – since refuted as being interpreted out of context – by the new US Treasury Secretary and former Fed chair, Janet Yellen.  She had commented that “it may be that interest rates will have to rise somewhat to make sure our economy doesn’t overheat.  It could cause some very modest increases in interest rates”  Note the ‘modest’ qualification in her statement.

However Yellen later went on to ‘clarify’ this statement in that she wasn’t forecasting interest-rate increases to rein in any inflation spurred by President Biden’s proposed spending  plans “It’s not something I’m predicting or recommending”.   Yellen went on to say that she didn’t anticipate a bout of persistently higher inflation, but that, speaking as a former Fed chair,  if inflation started to rise faster than the Fed felt comfortable with, the central bank has the tools to deal with it in any case.

The Fed is, however, likely to be extremely cautious in any policy change towards increasing interest rates given any such move could adversely affect the currently booming equities markets.  Tightening moves in the past had led to a sharp equities downturn and should this happen again it could damage the overall feelgood factor which the Fed and the government had been doing their best to subscribe to in today’s political and economic environment.   Perception seems to be the key here, and the recent strength in the equities markets tends to be the most visible measure of this.

The Fed would probably even welcome some increase in inflation as it has seen its target average inflation rate of 2% consistently undershot.  Thus a period of above 2% inflation to bring the average up to the target level might well be an integral part of its ongoing policy.  The big question here is what inflation level it might tolerate.  Fed chair Powell has consistently stated that the Fed’s view on inflation is that any increased level would only be transitory, and as long as it continues to hold this view it is unlikely to take any action to change its current policy on interest rates.  The next FOMC meeting comes up in mid-June and the deliberations at this will be closely watched to see if any nuances that  policy might be changed as the year progresses would be watched for carefully.

While the Yellen statement has been just one factor leading to better precious metals prices and for gold in particular as a perceived inflation hedge, there were some other supportive factors too.  Not least among these were some disappointing new job creation figures which, although positive, came in hugely below expectations.  These figures are being taken as indicating the US recovery from the pandemic-instigated recession may be progressing rather more slowly than the government would have us believe.  The US dollar index has also been falling and a lower dollar tends to show itself in higher precious metals prices.

Perhaps even more relevant, though, in the context of positive gold price pressure, was the speed at which it sliced up through the perceived $1,800 psychological gold price ‘barrier’.  This represents a change in momentum for gold – the most visible precious metal - suggestive of even better things to come for the gold investor.  At the start of the current week gold was trading in Europe at over $1,840, and although this came back a few dollars this suggests there could well be an attack this week, or perhaps next, on the next psychological gold price barrier level of $1,850.  If gold can break through here that puts $1,900 gold, and plus $28 silver, back in the sights, making an H2 target of gold at $2,000 and $30 silver, or above, as very realistic targets again.   These levels had seemed to be very much out of reach only a few short weeks ago.

Speaking of the perceived U.S. economic recovery from the Covid-19 impact, this has been rather quicker so far than many, including this writer, had predicted.  The U.S. vaccine rollout seems to be going well after a slow start, with much of the economy getting back to near normal.  Some sectors, though, have been particularly hard hit and could take years to recover, while others – notably in the tech sector – seem to have advanced, with stock indexes benefiting accordingly.  This writer still feels that equities in general are hugely overvalued by historic precedent and are thus due a crash – but perhaps not as severe a one, nor as soon, as had been predicted earlier. 

11 May 2021

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