Inflation data rattled traders as it came in higher than expected. What is the direct link between gold and inflation?
Inflation has created a double story for gold:
On the one hand, rising inflation will lead the Federal Reserve to abandon its dovish tone and return to a more conservative policy of raising interest rates in the medium term; on the other hand, if higher inflation remains, people’s purchasing power will suffer not only but also in many parts of the world.
Physical gold is a global asset, liquid and available, and could see increased investment demand from people around the world, in an attempt to protect their hard-earned cash from loss of purchasing power.
There have been a lot of talks lately about Cryptocurrencies, especially about gold and maybe they can somehow be similar, but I believe that, in case of unexpected inflation, it would be more correct for people to direct their wealth into products that have a long history such as safe-haven assets. If investors want to know where gold prices are going, they should take a look at the copper market.
In a report released by a former Bear Stearns analyst, it is argued that gold prices should be well supported as copper prices, which we remember to be the leading indicator of how the economy is performing, show higher inflation. We had already talked about it previously and in the next video, we are going to take stock of the situation.
In particular, the copper market has seen a confluence of bullish factors such as skyrocketing demand and declining supply, which have pushed prices to record highs, with double-digit performances.
Already at the beginning of the year, when copper reached all-time highs, it was clear that underlying inflation was too low and could start to rise.
Inflation hit nearly 4.2% in April, beating even most of the most aggressive forecasts. And while Fed economists keep repeating that this increase should be transitory, copper prices would seem to suggest otherwise.
Of course, in our view, inflation should generally pick up from its recent lows and especially for a longer period, ie even the next few readings.
Despite rising inflation, the gold market is struggling to find fresh upside momentum as prices fell briefly as they neared a technical resistance point at a one-week low following the CPI data.
In any case, it is always advisable to consider medium to long-term trends and look beyond short-term volatility. Were these nascent trends in inflation and interest rates to prove more than transitory, as Dr. Copper would seem to suggest, it would appear that the price of gold could be the next metal to outperform due to its unique ability to preserve purchasing power.