In many of my previous blogs, I have mentioned as to how some macroeconomic factors will play a significant role in influencing gold prices. One of the main factors were inflation. And finally this key driver has brought in the much awaited rally in gold prices.
Gold rallied more than 1% on the day as Federal Reserve Chair Jerome Powell said he hears America’s inflation worries “loud and clear” while still viewing these price spikes as temporary.
Gold notched a three week high on Wednesday following Powell’s comments. He said that inflation by all measures is running higher than expected. In fact, Chairman Powell, on Wednesday, acknowledged that inflation is above what the Federal Reserve is hoping to see. However, he tempered that statement by saying that this level of inflation will “moderate.”
To be precise, speaking before the house financial services panel, Chairman Powell said, “Inflation has increased notably and will likely remain elevated in coming months before moderating.”
The Fed has retained the stand that it will continue its current interest rate policy and monthly asset purchases until there was “substantial” progress towards its goal of full employment and stable long-run 2% inflation.
The monetary policy of the Federal Reserve prior to the pandemic and following recession was to keep inflation at a 2% target. However, the Fed has decided to let inflation run hot so that they can put their emphasis on maximum employment. The current inflation rate stands at 5.4%- the highest-level inflation has been at since the 2008 recession and largest increase since November 1991 confirmed the bullion king of India.
According to some market analysts at RiddiSiddhi Bullions Limited, gold is seeing some renewed buying interest as Powell’s comments appear to have a dovish tilt to them.
There was some havoc in the market as inflation gripped the US markets. Initial reaction from the Fed was a cool one. A denial mode continued, except he added that the policy changed will immediately come into effect if they feel that inflation is beyond control. So the imminent action will follow soon maybe taking few more weeks to taper.
Meanwhile on Thursday, the Chinese GDP (2nd quarter) grew 7.9% and its industrial output grew 8.3%.
While in the U.S PPI inflation stood at 1.0%- twice the expectation of 0.5%. USD index slipped to 92.4 and 10y yields more vigorously at 1.33%.
Let us understand what does this entail for people who are investing in gold.
The Federal Reserve is most likely to run the current mandate, allowing inflation to rise until they are able to see much progress and improvement in the employment numbers. The inflation rate currently are at record highs and the numbers are similar to what we had seen in 2008. In fact, if they do not raise rates in attempts to curtail rising inflation, we could see those numbers actually move higher. Not forgetting the fact that equities, which are an alternate to gold, do not qualify as inflation hedge.
Hence once again investors will move focus to gold which has time and again proven to be an inflation hedge tool.
And we all know what happens once demand rises. The yellow metal is expected to reach $2000 mark – a new target set by many investors in the markets.