Stagflation might not be enough to save gold - Bank of America
(Kitco News) - The gold market remains trapped below $1,800 an ounce andeven the rising risk of stagflation will not be enough to support prices in theshort term, according to analysts at Bank of America.
In a report published last week, analysts note that theprecious metal continues to face significant headwinds as central banks pushforward with plans to normalize monetary policies.
Gold prices last traded at $1,765.40 an ounce, down 0.16% onthe day.
The analysts said that what makes the current stagflationthreat different from other periods that were bullish for gold is that thelabor market continues to hold up relatively well. They noted that not allstagflation periods are the same.
"We measure stagflation using the 'Misery Index,' acombination of inflation and the unemployment rate. While misery triggered twogold bull markets between 1971 and 1981, gold quotations and the 'Misery Index'have diverged in recent months. In fact, the 'Misery Index' still remains belowthe level of 12.5%, which pushed the yellow metal higher on a sustained basisin the past.
Although the global supply crunch is pushing energy priceshigher along with inflation, Bank of America said that prices are below levelsthat have previously caused problems for the global economy. In the 1970s highenergy prices contributed to stagflation. Since the start of this year, WestTexas Intermediate (WTI) crude oil prices last traded up 70% to $82.51 perbarrel.
"Spiking oil prices are adding macro volatility too,but inflation is mostly perceived as transitory. And tightening output gapsshould push central banks towards normalizing policy rates," the analystssaid. "Oil demand and prices could push higher from here over... Yet, thatneeds to play out, before gold would take a bid."
The analysts said that rising inflation is pushing bothnominal and real interest rates higher, which are increasing gold's opportunitycosts. Bank of America expects U.S. bond yields to rise to 1.90% by the fourthquarter of 2022. At the same time, U.S. CPI is expected to be around 2.4% bythe end of next year.
Although gold prices face some near-term headwinds, Bank ofAmerica does see some potential for the precious metal as interest rates areexpected to remain low as government debt has ballooned through the COVID-19pandemic.
"Our colleagues in rates research recently outlinedthat the level of outstanding debt and the amount of debt servicing expense aneconomy can tolerate are important drivers of the ability to raise rates,"the analysts said.
The analysts said that bond yields could be capped at 2%before causing problems for the U.S. economy and equity markets.
"With CPI inflation likely staying above 2% near-term,this implies that negative real rates may remain a reality going forward,"the analysts said.
By Neils ChristensenFor Kitco News
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