Inflation threat can drive gold prices back to $1,830 next week
(Kitco News) - The growing inflation threatremains the most extensive support for the gold market as analysts see thepotential for prices to test critical resistance around $1,830 in the nearterm.
Friday morning, gold pricespushed to a six-week high as rising inflation pressures have pushed breakevenrates in the five-year bonds to their highest level in a decade. The breakevenrate is the difference in yields between bonds and Treasury Inflation-ProtectedSecurities (TIPS). The difference represents the inflation rate needed toequalize their returns.
However, gold lost somesignificant ground, falling $30 in a matter of minutes after Federal ReserveChair Jerome Powell tried to talk down the rising inflation threat.
In an online conferencehosted by the South African Reserve Bank, despite significant sound issues,Powell reiterated his outlook that the U.S. central bank is on track to reduceits monthly bond purchase before the end of the year. He added that the monthlypurchases are expected to end by mid-2022.
However, not all analysts areconvinced that Powell and the U.S. central bank will be able to resolve thegrowing inflation expectations.
Daniel Pavilonis, seniorcommodities broker with RJO Futures, said that the rise in yields couldindicate that inflation expectations are becoming unanchored and with economicactivity starting to slow, the Federal Reserve will have limited tools.
“I don't think the FederalReserve has the ability to bring inflation back under control," he said. “Weare seeing the risk of stagflation continue to grow and that will be good forgold and all commodities. Gold will do well as investors will see it as a valueplay."
Wade Guenther, managingpartner at Wilshire Phoenix, said in a recent interview with Kitco News that healso doesn't see the Federal Reserve getting ahead of the inflation curve.
Guenther explained thatinflation is currently being driven by the continued disruption of the globalsupply chain. He added that the supply crunch could last longer than isinitially expected, which means inflation will remain elevated.
“There is nothing the FederalReserve can do to fix the supply chain," he said. “This is not inflation drivenby consumer demand."
Although he remainedrelatively positive on economic activity, Powell noted a growing risk that thesupply-chain disruptions persist longer than expected, which could keepinflation high through 2022.
However, he added that thebase case is for the supply bottlenecks to be resolved and for inflation tofall back to 2%.
Inflation is also a growingglobal problem. This past week Canadian data showed that consumer prices roseto their highest level in 13 years last month.
In Britain, inflationpressures remained elevated and above the Bank of England's target for a secondconsecutive month.
Gold looks good, butstill faces a lot of competition
While inflation pressurescontinue to support gold prices, analysts note that the dynamic has changed slightlyas the precious metal faces new competition, particularly from Bitcoin.
This past week, bitcoinprices rose to a new record high above $65,000 an ounce. The rally in thedigital currency coincided with the launching of a new Bitcoin exchange-tradedproduct (ETF). The ProShares Bitcoin Strategy ETF started trading Tuesday andtracks CME Bitcoin Futures.
Some analysts have noted thatalthough the new Bitcoin ETF adds a new layer of legitimacy to the digitalcurrency marketplace, it is not a significant gamechanger for gold.
“Yes, bitcoin has taken somemomentum and capital away from the gold market, but gold is far from beingobsolete," said Ole Hansen, head of commodity strategy at Saxo Bank. “Willevery gold investors sell their gold to buy Bitcoin? No."
Hansen added that equitymarkets, which are trading near record highs, are also strong competition forgold. However, he said that momentum can quickly shift back to gold's favor ifthe precious metal can break above $1,835 an ounce.
U.S. dollar remains aheadwind for gold
Along with Bitcoin and equitymarkets, analysts also say that they are still keeping an eye on the U.S.dollar. The U.S. dollar index has managed to hold critical support above 93.50points.
David Madden, market analystat Equiti Capital, said that while he sees room for gold prices to testresistance around $1,830, he doesn't expect that level to break.
He added that a significantrisk event next week for gold and the U.S. dollar will be the European CentralBank's monetary policy meeting. The euro has lost some ground against both theBritish pound and the U.S. dollar; however, Madden said that the ECB probablylikes this current environment and will be careful not to shift the currentmarket sentiment.
He added that if PresidentChristine Lagarde strikes a dovish tone and downplays the inflation outlook,that could weaken the euro against the U.S. dollar, which would be negative forgold.
Data to watch nextweek
While the ECB will be themain focus next week, the Bank of Canada and the Bank of Japan are also holdingmonetary policy meetings. The bank of Canada could be under pressure to tightenits monetary policies sooner than expected after inflation rose to a 13 yearhigh in September.
The economic docket will alsohave some important U.S. data. Tuesday markets will receive U.S. consumerconfidence data for October and new home sales numbers for September. Wednesdayis the release of durable goods report that will gauge the health of thenation's manufacturing sector.
Thursday markets will receivethe first reading of third-quarter U.S. GDP. Analysts have said that any missin this report could be good for gold as it would raise further fears of thegrowing stagflation fears.
The week ends with therelease of October inflation data and personal consumption and income numbers.
By Neils ChristensenFor Kitco News
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