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NAJ News
Gold is caught between worries over inflation and expectations of reduced economic stimulus, explains David Brough.
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old prices are between a rock and a hard place. Bullion’s appeal as protection against inflation buoys the prices, but they are under pressure from expectations that monetary authorities will soon reduce stimulus packages implemented to support economies during the pandemic. Gold prices fell in mid-October after surprisingly positive United States September retail sales data, which boosted share prices and fed sentiment that interest rates would rise again from rock bottom levels sooner than previously thought. At the time of going to press, bitcoin as well as shares had jumped, reducing the appeal of gold as an alternative asset class. Spot gold was down 1.5 per cent to $1,768.38 per ounce on 15th October. However, gold prices lifted in reaction to nagging inflationary fears around the world, including in the UK, as supply chain shortages dragged on economic growth. An increase in consumer prices in the
The Jeweller
United States, the world’s biggest economy, also supported gold prices, but figures on 14th October showed US producer prices posted their smallest gain in nine months in September. US consumer inflation rose solidly in September, driven by increases in prices of food, rent and other goods, according to data on 13th October. “The higher inflation is allowed to rise, the ever-greater the loss of buying power of the domestic currency,” wrote Lawrie Williams, gold price commentator with London bullion dealer Sharps Pixley. “This will, in turn, lead those looking to protect whatever wealth they may have to turn to tried and tested safe havens like gold.” Jeff Christian of New York-based precious metals consultancy CPM Group said that while gold was a protection against what he called “catastrophic” inflation, it did not react in lockstep to gnawing inflationary trends, up one or two per cent, and so on. While gold is seen as an inflation hedge, reduced monetary stimulus – including expectations that US interest rate rises may come earlier than previously expected – pushed government bond yields higher in mid-October, raising the opportunity cost of holding bullion, which bears no yield. Some analysts believe gold is undervalued
because US monetary authorities have been signalling that inflationary pressures are transitory. Evidence of more prolonged ongoing price pressures may spur more gold buying. Some analysts are sceptical that inflation will be short-lived.
Currency impact The pound hit a two-week peak in midOctober, underpinned by receding fears of a trade war between the European Union and the UK, and on growing sentiment that the Bank of England could move to raise interest rates from their current historic lows earlier than previously thought, possibly as soon as this year. Previously, many analysts had predicted the UK central bank would not raise rates before late next year at the earliest. A firmer pound makes purchases of dollardenominated gold cheaper to UK-based gold jewellery manufacturers. Currency markets are focusing on whether expectations of a possible UK rate hike later this year are premature, with some analysts sensing it may still be too soon to risk destabilising the economic recovery as pandemic restrictions ease. If trade tensions between the UK and EU do pick up again, further gains by sterling against the dollar may be limited.
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n September, just ahead of the CIBJO Congress, the CIBJO Precious Metals Commission, headed by Huw Daniel, released its Special Report, which reviews the year in the gold, platinum, palladium and silver markets and looks at how they fared in a world economy in the shadow of a pandemic. In general, all four precious metal markets experienced robust sales, with prices rebounding from their lows during the disruptive turmoil of 2020. “In many ways, the pandemic has simply accentuated the roles these metals have always played in providing a safe haven to investors,” Mr. Daniel wrote. A clear factor in creating robust market conditions was the strong recovery in jewellery demand, innovation in the development of new products and the savvy use of social media marketing. To see the report, visit www.cibjo.org/congress2021/specialreports/
