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(Kitco News) – The gold market is once again in a street brawl as it battles rising interest rates and expectations that the Federal Reserve will tighten monetary policy sooner possible.
After two strong months of rising prices, we are starting to see a change in sentiment in the precious metals market. So far this month, gold has been unable to maintain gains above $ 1,900 an ounce, even as real yields have fallen to a one-month low at minus 94 basis points.
Inflation continues to be the dominant factor for the gold market. For some, gold’s weakness heading into the weekend is a bit surprising after the US Department of Labor announced a 5% annual increase in its Consumer Price Index, the largest increase since August 2008. Excluding volatile food and energy prices, consumer inflationary pressures rose 3.8% for the year, the largest increase since 1992.
Briton Hill, President and Partner of Weber Global Management, put the growing threat of inflation into perspective in an interview with Anna Golubova. “Let’s say if the S&P 500 goes up 5% or 6%, but the inflation rate is up 8%. On paper, everyone made money, but in real terms they made money. actually lost money because the inflation rate is so high, ”he said. mentionned.
“If you’re not careful you can miss something like this. And by the time it’s over, it’s too late. You’ve already lost a lot of the wealth,” added.
However, gold is suffering because, while inflationary pressures are on the rise, there are still expectations that these pressures will ease as the US economic recovery continues. It is also increasingly expected that, due to the looming inflation threat, the Federal Reserve will have to tighten its monetary policy and cut its bond buying program sooner than expected.
We are already starting to see banks lose some of their belief that gold prices will hit new highs by the end of the year. This week, Societe Generale analysts warned that gold’s path to $ 2,000 was getting a little more complicated.
“We expect flows to be positive in 2021 on reflation trade, but rising rates mean there are conflicting forces affecting the price of gold. It will be important to assess whether the market remains focused on real rates, which are expected to remain slightly negative due to inflation, or nominal rates, which are expected to rise and appear to increase the opportunity cost of holding gold. “the analysts said.
However, not everyone experiences a crisis of faith. This week, billionaire “Bond King” Jeff Gundlach reiterated his bearish call for the US dollar and for gold prices to rise much higher.
Kristina Hooper, chief investment strategist at Invesco, also has an interesting take on the current environment. She added that while she expects inflationary pressures to turn out to be transient, there is a tactical argument to hold gold for the next six to 12 months. She noted that inflation is likely to get worse before it gets better.
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