Gold Rides Inflation’s Coattails to Recent Highs

As prices start to creep up and the Fed says it won’t raise rates in the near term, one analyst outlines how gold’s prospects appear to be as good as ever.

Inflation and gold

In a recent analysis, FXEmpire’s Arkadiusz Sieron looked at some of gold’s near-term and long-term prospects, both in the context of the latest jump in inflation and a reopening rollback that is threatening to further dwindle the economy.

As Sieron notes, June marked the biggest inflationary spike since 2012, with the CPI inflation rate rising by 0.6%. Normally, this might translate to a more hawkish Federal Reserve policy, primarily in the form of interest rate hikes. Considering the havoc caused by the global pandemic, however, Americans can expect anything but. The Fed has pretty much confirmed that it will stick to its zero interest-rate policy for the foreseeable future. Officials even stated that any possible hiking of interest rates would come with an implemented cap, cementing the all-important dovish Fed stance that has consistently driven gold up.

This leaves market participants with a clear picture of prolonged zero nominal rates and negative real rates, with many experts considering the latter to be of greater importance. While the rise in inflation was relatively meager, Sieron believes that the inflation rate might have bottomed out for the time being. That inflation can only go up from this point are great news for gold, which is well-known for being the best hedge against wealth erosion. Keeping this in mind, it should come as no surprise that gold has traded firmly above the $1,800 level over the past week, nearly touching $1,815 on Friday.

Furthermore, the surge in coronavirus cases plays into both the inflationary picture and the concerning economic outlook moving forward. As Sieron points out, the decrease in consumer spending and the economic contraction have not affected long-term inflation expectations, and they are unlikely to given the current climate.

Inflation is just one of gold’s current tailwinds, though. The economic contraction has slashed investors’ appetite for risk, exemplified by corporate and bank losses across the board. Sieron, like many others, believes that the true economic issues pertaining to the coronavirus have yet to be felt. These might be exacerbated by the recent flare-up in tensions, trade and otherwise, between the U.S. and China.

The trade war between the two economic powerhouses, which was one of gold’s biggest drivers in 2019, has now assumed an entirely new shade of red. Given these factors, Sieron thinks gold may have found exceptionally strong support at $1,800. Any dip below will likely be followed by people jumping to the opportunity to hedge their bets in an environment riddled with an incredibly large amount of question marks.