Mitsubishi: Rising Inflation Could Impact Gold Investors Two Different Ways
(Kitco News)- Rising U.S. inflation could prompt contrasting reactionsamong gold-market participants, Mitsubishi pointed out in a report Monday.
Rising costs tend to mean higher Treasury yields that inturn underpin the U.S. dollar, thereby hurting gold. Yet, Mitsubishi alsopointed out, there is also potential for some market participants to buy gold as an inflation hedge.
“The week ahead should bring some further clarity on whetherexpectations of higher interest rates are justified by rising inflation - corepersonal consumption expenditure inflation, the Fed’s preferred measure, todaycame in at 1.9%, the highest since 2016 and tantalizingly close to the Fed’s 2%target,” Mitsubishi said.
“Though rising inflation implies higher interest rates, forgold there is potential upside from investors buying the metal as an inflationhedge.”
In fact, Mitsubishi pointed out, while gold fell last weekdue to the macroeconomic environment and an easing of geopolitical concernsafter a summit between the leaders of South Korea and North Korea, the metalalso avoided a capitulation, such as in December when similar circumstanceswere in place.
“One reason that gold is holding up, and may continue to doso, is that the rally in yields is underpinned by expectations of higherinflation - with crude oil at three-year highs and the Fed’s preferred measureof inflation heading towards 2%, investors may increasingly be looking to hedgerising prices with some gold in their portfolio,” Mitsubishi said.
Additionally, the firm said, there is some uncertainty aboutthe stock market, with some wondering if a “sugar rush was already baked intoshare prices,” thereby meaning potential for gold buying as a hedge.
The U.S. Federal Open Market Committee meets this week. Financialmarkets are not expecting an interest rate hike. Still, any hawkish comments oninflation and the future direction of rates likely would lift yields and couldweigh on gold, Mitsubishi said.
The firm pointed out that gold historical inverserelationship with Treasury yields was on display last week, as gold prices fellas 10-year yields rose above 3% for the first time since 2014.
“However we note that the spread between two- and 10-yearTreasury yields, widely seen as a harbinger of recession, has continued tonarrow and is now at the lowest since 2007, where it was on the eve of theeconomic crisis,” Mitsubishi said. “In this environment, risk hedging maycontinue to support gold.”
By Allen SykoraFor Kitco News
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