Gold prices bounced back on Wednesday, holding near their highest levels since June, as the worry of inflation continues to push investors toward the safe-haven metal. Gold prices jumped by more than $50/oz for multiple reasons, but yes, mainly inflation, says the bullion king of India, Prithviraj Kothari. Let’s have a look at the key events that have occurred and are most likely to transpire soon –
- Yields – The U.S. 10 year yields surged again beyond 1.60%. The benchmark U.S. 10-year Treasury yields recorded a modest climb on Thursday but retreated from a three-week high hit during the previous session. An auction of the 20-year bonds was also disappointing.
- Rate Hike – On Tuesday, Treasury Secretary Janet Yellen extended the potential U.S. Government’s deadline default from Dec 3 to Dec 15. This deadline allows Congress more time to raise the federal debt ceiling as lawmakers also consider massive social spending and climate bill. Most Fed Voices now reassured that – to combat inflation, an emergency route for interest rate hike cannot be ruled out. The rate hike has always been a major influence on gold, according to the bullion king of India.
- Bond Buying – In the near term, the reductions in the purchase of signal assets may be speeded up to fight inflation or if the market believes rates would rise sooner than anticipated. The U.S. central bank began phasing out its bond-buying this month and expects to end purchases altogether by mid-2022. The U.S. Federal Reserve will only complete asset tapering in mid-2022, Chicago Fed President Charles Evans said on Wednesday. However, the central bank will continue to monitor whether record-high inflation levels will come down as he expects, Evans added. The wind-down of its bond-buying program will not be completed until the middle of next year, even if the central bank checks whether high inflation eases.
- CPI – The latest U.S. inflation data showed a sharply higher CPI for October with a headline rate of 6.2%, the highest in over three decades. Across the Atlantic, a jump in U.K. inflation in October raised expectations that the Bank of England will hike interest rates in December. The consumer price index grew a higher-than-expected 1.1% month-on-month and 4.2% year-on-year.
- Inflation – The market participants are focusing on the real threat of spiralling inflation, that economies are facing globally. The U.K. reported that inflation has now hit a 10-year high. In the U.S., the current inflation level is at a 31-year high, coming in at 6.2%. Mexico currently has an inflation rate of 6.24%, and many South American countries are running double-digit inflationary levels, such as Argentina (52.1%), Brazil (10.67%).
The underlying support for gold and silver remains the inflationary pressures we continue to see in the market. Currently, we cannot be sure where gold is heading because uncertainty levels are very high. There is no clarity related to the U.S. Dollar’s performance and the likely response of the U.S. Fed and other central banks to inflation.
Bullion, considered a hedge against inflation, has gained on the back a surge in consumer prices in the U.S. and Europe. But that has also bolstered bets for early interest rate hikes, which would increase the opportunity cost of holding non-yielding gold, says Prithviraj Kothari. Until the Fed signals an accelerated taper, gold should hold its current $1,850 and $1,875 range.
Based upon our economic recovery occurring at a much more prolonged period than originally anticipated and the vast amounts of government capital that have been used to aid in that recovery, it is no wonder that market participants have once again focused upon the safe-haven asset that for hundreds of years have kept up with inflation, which is gold.