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Saturday, 17 July 2021

Gold expected to reach new highs

In many of my previous blogs, I have mentioned as to how some macroeconomic factors will play a significant role in influencing gold prices. One of the main factors were inflation. And finally this key driver has brought in the much awaited rally in gold prices. 

Gold rallied more than 1% on the day as Federal Reserve Chair Jerome Powell said he hears America's inflation worries "loud and clear" while still viewing these price spikes as temporary.

RSBL analysts confirmed that gold notched a three week high on Wednesday following Powell’s comments. He said that inflation by all measures is running higher than expected. In fact, Chairman Powell, on Wednesday, acknowledged that inflation is above what the Federal Reserve is hoping to see. However, he tempered that statement by saying that this level of inflation will "moderate."

To be precise, speaking before the house financial services panel, Chairman Powell said, "Inflation has increased notably and will likely remain elevated in coming months before moderating."

The Fed has retained the stand that it will continue its current interest rate policy and monthly asset purchases until there was "substantial" progress towards its goal of full employment and stable long-run 2% inflation.

Prithviraj Kothari of RSBL stated that the monetary policy of the Federal Reserve prior to the pandemic and following recession was to keep inflation at a 2% target. However, the Fed has decided to let inflation run hot so that they can put their emphasis on maximum employment. The current inflation rate stands at 5.4%- the highest-level inflation has been at since the 2008 recession and largest increase since November 1991.

According to some market analysts, gold is seeing some renewed buying interest as Powell's comments appear to have a dovish tilt to them.

There was some havoc in the market as inflation gripped the US markets. Initial reaction from the Fed was a cool one. A denial mode continued, except he added that the policy changed will immediately come into effect if they feel that inflation is beyond control. So the imminent action will follow soon maybe taking few more weeks to taper. 

Meanwhile on Thursday, the Chinese GDP (2nd quarter) grew 7.9% and its industrial output grew 8.3%. 

While in the U.S PPI inflation stood at 1.0%- twice the expectation of 0.5%. USD index slipped to 92.4 and 10y yields more vigorously at 1.33%. 

What does all this mean to gold investors?-   the Federal Reserve is likely to continue their current mandate letting inflation continue to run hot until they see substantial progress towards full employment. With the inflation rate already at record highs similar to those seen in 2008, if, in fact, they do not raise rates in attempts to curtail rising inflation, we could see those numbers actually move higher. Not forgetting the fact that equities, which are an alternate to gold, do not qualify as inflation hedge.

Hence once again investors will move focus to gold which has time and again proven to be an inflation hedge tool.

And we all know what happens once demand rises. The yellow metal is expected to reach $2000 mark – a new target set by many investors in the markets.

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