Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

Interest rates, inflation, and Trumpian troubles point up for gold

Interest rates, inflation, and Trumpian troubles point up for gold

 

Gold prices of late have been testing support just under the market, if you will, preparing for a healthy rally into higher territory.

As I see it, a relatively small group of hedge funds and institutional speculators have been calling the tune for gold, trading the recent range, buying on dips, selling on rallies, and gradually adding to their physical holdings – a behavioral pattern we expect will continue within a rising trading range – at least until a price above the $1300 an ounce level is well established.

Contributing to support under the market, price-sensitive Asian traders continue to bottom feed, accumulating bullion for the billions of gold-friendly households in their region with cash to spend.

Meanwhile, short-term hour-to-hour and day-to-day price action has been governed by the latest news with respect to interest rates, inflation, the dollar, and Trump’s troubles in the White House.

Real Rates Matter Most

With respect to prospective interest rates, a growing number of financial-market participants believe an increasingly hawkish Fed will vote for a quarter-point hike interest-rate hike as early as March when the FOMC, the Fed policy-setting committee, next convenes.

Conventional wisdom suggests that rising interest rates should be bullish for the dollar and bearish for gold.

But while nominal interest rates may be rising in the next few weeks and months, real “inflation-adjusted” interest rates are already falling, as evidenced by rising inflation rates – note this week’s consumer price (CPI) and producer price (PPI) reports both rising 0.6 percent for the past month.

In my view, an accelerating U.S. consumer-price inflation rate will outpace any increase in nominal rates brought about by the Fed – a trend that will contribute to record high gold prices in the next few years.

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