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LAWRIE WILLIAMS: U.S. inflation fears give gold a kick in the pants!

The gold price drifted a little lower in Asian and European trade this morning, but recorded a massive uptick when the U.S. markets opened on the back of higher inflation data which gave the somnolent metal a proverbial 'kick in the pants' to awaken it from drifting off again.  At the time of writing the gold bears had made an attack and the battle was still raging as I posted this article.

There certainly has been the impression that the gold price had been stabilising and was thus poised to move higher once the current consolidation phase came to an end.  As we have been saying all along, throughout gold’s trials and tribulations, the basic economic factors of continuing low to negative interest rates, joined recently by a weakening dollar, should be working in gold’s favour.  There have been warnings that the Fed might see rising inflation rates as a trigger to raise base rates, but it has repeatedly given the impression that it will not do so – perhaps unless inflation really gets out of hand.  The inflation rate has some way to go before this is seen as a problem by the Fed.

Certainly, the investment public – at least the traditional element of it – appears to be taking notice, as it is apparent that sales of the individual investor’s favourite small gold counter, the gold coin, seems to be surging all around the world.  Sales of American Eagles one ounce gold coins have been strong of late and on the other side of the world, Australia’s Perth Mint has been reporting its highest gold sales level since 2012, within which sales of gold coins and minted bars jumped to more than 130,000 ounces in its latest figures for March, up 4.8% month-on-month and 39% from a year earlier.

With demand rising in India and, we believe, in China too, gold is beginning to see something of a resurgence in uptake.  Further the massive gold outflows from the big gold ETFs seems to have slowed to a trickle, and there is even evidence from some non-U.S. gold backed ETFs that investment in them may be growing again.  With Hungary announcing a big rise in its gold reserves, following on from Poland’s similar announcement last year, there is also some speculation that central bank buying this year might even be due for an increase, although the two biggest buyers over the past few years – Russia and China – still appear to be out of the market.  Turkey, the biggest buyer last year, however, reported selling some gold out of its reserves, but past Turkish central bank policy regarding gold purchases and sales has tended to be erratic and volatile, so we reserve judgement on whether such sales will continue, or perhaps reverse.

Today’s gold market action looks like it may see the metal making yet another strong run at the $1,750 level – a point at which it has stalled thereabouts on a couple of days recently.  Sentiment may be moving a little in gold’s favour and if a breakthrough above $1,750 occurs, and looks solid, then a return to $1,800 looks possible sooner, rather than later.

However, we don’t expect fireworks in the gold price in the near and medium term, but we wouldn’t be too surprised to see it regain the $1,800 level within the next few weeks, and stay reasonably strong for the remainder of the year.  Whether this potential strength can take it back up to $2,000 at the moment seems perhaps unlikely, but one can’t rule that out – particularly if there is some big geopolitical blow-up. 

The South China Sea and the Donbass region of Ukraine, remain as serious potential flashpoints for political impasses to turn into military action pitting some of the world’s superpowers against each other.  Looking cynically at the war potential, limited actions may suit the military elements of both sides in seeing how their modern weapons and defensive systems fare against each other in real-time conflict, rather than in computer simulations.

13 Apr 2021 | Categories: Gold

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