Official data released this week has confirmed that inflation is now running at its highest level in more than 13 years; a piece of news which signals trouble on the horizon for stock markets, and good things ahead for gold. The yellow metal made notable gains in the wake of the inflation data, adding £29.13 ($40) to pricing in the immediate aftermath – something which seems all but certain to continue given fears around price pressures, slow growth and stagflation.
Wednesday’s figures show inflation running at 5.4%, higher than what analysts had called for ahead of the data being released. The impact of this will be far ranging according to experts and create a highly supportive environment for the gold bulls.
Edward Moya, the Oanda senior market analyst said, “We are starting to see the market growing nervous about the U.S. consumer. After digesting this report, it shows that the market is now anticipating sooner rate hikes. At the same time, we see the yield curve flattening, and that is good news for gold. Gold is entering a period where risks now outweigh the reopening trade, and we’ll see more safe-haven flows into gold. This is a major reversal of trends and very positive for gold.
“Potentially, gold will no longer see significant weakness whenever we get more inflationary pressures because now inflationary pressures will mean growth concerns.”
Moya also expects that this confirmation of soaring inflation and the threat of a stagflation environment will mean that the Federal Reserve will have to revisit its tapering timeline, again favouring gold. He adds, “Initially, Powell highlighted that tapering will be completed by the middle of next year. Now, expectations are that it will be done sooner, before we get to hot summer months… [it’s a] game changer for gold… I am still looking for further momentum. We’ll see prices continue to move towards £1,340 ($1,840), which is where prices will consolidate more.”
Phillip Streible, the chief market strategist at Line Futures, also expects we will now see the gold bulls in firm control. He said, “The IMF is continuing to downgrade global growth and rising inflation, and that is the stagflation environment that gold thrives so well on.”
For many, inflation is just one of a number of factors favouring gold right now and creating an environment which allows the yellow metal to shine. Moya adds, “There’s now over 90% chance that the Fed will raise rates by September 2022. There’s uncertainty with the global energy crisis and the potential that Biden will make an announcement on China. Investors are scrambling for safe-haven positions. The Fed has done everything it can on the employment front. Even if we start to see sluggish job growth, with infrastructure spending, you’ll see stable hiring in the first half of the year. This could allow gold prices to rally because the market will become more fixated on the inflation side of things.”
With the stars aligning for gold to begin inching ever closer to new all-time highs, buy now.