As Inflation Expectations rise, Gold looks more Attractive to Investors
Surprise, surprise! Despite last week’s move by the U.S. Federal Reserve, America’s central bank, to tighten monetary policy a notch, gold prices surprised many observers of and participants in the gold scene, even those who had expected the quarter-point increase in short-term interest rates would be sufficient to knock the metal into a still-lower trading range under $1,200 an ounce.
After all, higher interest rates are widely perceived as a negative or bearish influence on the gold price. But, as noted below, it is really the notional real “inflation-adjusted” rate of interest, not the “nominal” rate as might be quoted by a bank or other lender.
Not only did the Fed dial up short-term rates by a quarter percentage point, it suggested further tightening later this year and next, depending on economic performance and inflationary tendencies later this year. Yet, contrary to popular expectations, gold prices still moved higher despite the Fed tightening.
It just might be that inflation expectations are suddenly on the rise, as financial markets get a grip on the Trump administration’s economic and trade policies.
Having fallen briefly a tad under $1,200 an ounce in the days leading up to the Fed’s policy announcement last Wednesday, the yellow metal ended last week at $1,230 an ounce – a gain of some 2.5 percent over the prior week and 15 percent from year-end 2016.
As trading resumed this week in world gold markets, it now looks like gold prices are set to move still higher. In the short run – measured in hours, days, and weeks – hedge funds, commodity funds, and other institutional speculators are both reacting to and contributing to the market’s upward momentum.
Traders don’t want to miss out on a good party, let alone a major move up into a higher bracket. As they wade deeper into the market, stepping over and breaking through important trading levels, the market’s upward momentum is attracting still more buying, advancing the rally still further. Before long, a growing number of traders will see more than just another rally but a firm resumption of the long-term bull market.
Indeed, the market is now at an important juncture with key fundamentals and technical trading setting up the possibility of a self-fulfilling prophecy where buying begets more buying – all of which is fueled by increasingly bullish fundamentals.
First and foremost, despite the rise in nominal interest rates, as “real” or “inflation-adjusted” interest rates continue moving lower, gold looks increasingly more attractive to investors, large and small, around the world.
In other words, as inflation expectations rise, the real rate of interest moves lower and lower – making gold look increasingly more attractive. And this, along with technical factors and market psychology, is pushing gold prices higher.
Submitted by: Jeffrey Nichols
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