Powell talks down inflation and gold follows
(Kitco News) - As a gold investor, if you were expecting an easyend to what has been another relatively quiet week, you were unfortunatelymistaken.
The day started with plenty of optimism in the precious metal market, with gold and silver prices soaring higher. Gold managed topush to a six-week high above $1,800 an ounce.
However, that initial optimism was short-lived after Federal ReserveChair Jerome Powell talked down the growing inflation risks.Speaking during an online conference hosted by the South African Reserve Bank,despite significant sound issues, Powell said that the bank is on track toreduce its monthly bond purchase.
On the inflation threat, Powell said that although risks are growing, heexpects that supply-chain issues will eventually be resolved and inflation willfall back to 2%.
Powell's comments caused gold prices to drop roughly $30 from their sessionhighs. However, heading into Friday's close, gold investors are showing theirgrit as prices push back to within a few dollars of $1,800 an ounce.
Despite what Powell says, markets are seeing inflation as more than a"transitory blip." Companies worldwide are facing an energy crisis,supply-chain bottlenecks and labor market shortage. Some economists areexpecting some of these issues to persist through 2022, which means inflationpressures, already elevated, won't be going down anytime soon.
We can see rising inflation expectations in the bond market as breakevens startto rise to multi-year highs. Five-year breakeven yields are at their highestlevel since 2004. Many commodity analysts expect gold to regain its luster as theFed remains behind the inflation curve.
However, not all analysts are convinced that higher inflation and lower growth,also referred to as stagflation, will be positive for gold. In a recent report, Bank of Americasaid that the current environment, despite higher inflation, is still not greatfor precious metals. They noted that not all stagflation periods arethe same.
"We measure stagflation using the 'Misery Index,' a combination ofinflation and the unemployment rate. While misery triggered two gold bullmarkets between 1971 and 1981, gold quotations and the 'Misery Index' havediverged in recent months. In fact, the 'Misery Index' still remains below thelevel of 12.5%, which pushed the yellow metal higher on a sustained basis inthe past," the analysts said.
So for now, we have to wait and see who will be right: the Fed or markets.
Have a great weekend
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