The gold market has recovered from its lows. However, US inflation is still struggling to find solid upward momentum after rising 9.1 percent in June. At this point, many analysts are expressing their thoughts about which levels will be next. Here are the details…
What’s next for gold?
Some gold investors have been frustrated by gold’s recent price action, as the precious metal has traditionally been viewed as an inflation hedge. Gold is starting to see some solid gains as markets digest the latest US Consumer Price Index report. August gold futures were last up 0.72 percent on the day at $1,738.30 an ounce. However, some analysts point out that gold’s relatively disappointing price action makes sense across the broader market.
Despite the rise in gold, analysts say markets do not see inflation as a long-term threat as the US Federal Reserve (FED) aggressively raises interest rates. That’s why the precious metal often struggles as an inflation hedge asset, he notes. Following the June Consumer Price Index report, markets are now pricing in more than a 50 percent chance of the U.S. central bank moving exactly 1.00 percent. CPM Group used the following statements in a note:
While in theory gold prices should benefit from higher inflation figures, the reality is that these higher inflation figures suggest the Fed may become even more aggressive in raising rates to quell strong inflation. This results in a stronger US dollar against other major currencies and puts a cap on future inflation expectations.
How does the Fed’s rate hike affect inflation?
Although inflation is on the rise, the Fed’s determination to reduce inflation raises real yields. This results in lower break-even rates. Breakeven rates, the difference between nominal and real returns, fell along the curve the fastest in two years. Ole Hansen, head of commodities strategy at Saxo Bank, pointed out the discrepancy between inflation and the one-year/one-year breakeven rate below 4 percent. At the same time, the five-year/five-year break-even ratio hovers around 2.6%. Hansen used the following statements:
There is a 5% difference between where inflation is expected to be over the years and its current state. Will we see inflation fall by 5%? I really doubt that. But for now, the market is betting on it. The Fed’s ability to raise interest rates and reduce growth brings inflation along.
FED’s rate hike, inflation and gold: How does it affect?
Katherine Judge, senior economist at CIBC, said she expects inflation pressures to continue to ease as the Fed aggressively tightens interest rates. Colin Cieszynski, chief market strategist at SIA Wealth Management, said the broad-based decline in commodities as copper fell to several-year lows indicates that fears of recession have replaced fears of inflation.
Inflation pressure underlying commodity prices has begun to ease,” he said. “People expect a demand drop as the global recession hits. That’s why commodities are falling,” he said. However, the question remains whether a recession will cause enough demand destruction to affect major global supply problems. He added that this will determine how persistent inflation will be through 2023.
Economy facing supply problem
Analysts noted that the global economy is facing fundamental supply problems. OPEC on Tuesday said it has seen oil demand rise to 102.99 million barrels per day from the projected 100.29 million barrels per day for this year. Forecasts suggest that oil supply may remain constrained next year as growth in non-OPEC production, which is affected by Russia’s losses, lags behind demand growth.
Oil is not the only market facing increased demand and weak supply. Copper prices have fallen sharply in recent weeks. However, warehouse levels are at historically low levels. According to inventory data, there were only 696,109 tons of registered copper in LME warehouses at the end of June. Analysts said it was the lowest level seen this century. Despite gold being oversold, Cieszynski said he cannot ignore test support at $1,680 an ounce in the near term. However, he added that gold continues to show some relative strength compared to other assets, especially in the face of the massive momentum in the US dollar.
