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Standard Chartered: Inflation Expectations Could Boost Interest In Gold

Standard Chartered: Inflation Expectations Could Boost Interest In Gold 

 Allen Sykora - Wednesday January 24, 2018 09:18 

(Kitco News)

Standard Chartered sees potential for interest in gold as an inflation hedge to pick up again. “Rising inflation expectations as a driver of gold prices have provided little motivation for investors to buy gold over the past year,” analysts say. This has occurred since inflation has not materialized despite quantitative easing in key developed nations. “The relationship between gold and inflation expectations has been mostly in neutral territory over the past two years,” Standard Chartered says. “But after the hiatus, investors are once again looking to gold as a potential inflation hedge.” For now, gold has the strongest correlation with the U.S. dollar, followed by five-year U.S. Treasuries, analysts say.  “Gold tends to perform well as an inflation hedge if it is bought before inflation picks up and in periods of high inflation,” Standard Chartered continues. “Our economists forecast the y/y increase in inflation to average below 2% in the U.S. and euro area, 2.7% in China and 4% in India in 2018. We do not expect inflation to be a key driver this year, but rising inflation expectations could be more important to track. We believe the macro environment sets a positive backdrop in 2018 given our expectations for the USD to weaken, and our global growth and inflation expectations amid continued geopolitical and political uncertainty.” 

Gold prices are now within “hailing distance” of a technical breakout area around $1,360 an ounce, says George Gero, managing director with RBC Wealth Management. Around 8:50 a.m. EST, Comex February gold was $15.60 higher to $1,352.30 an ounce and peaked at $1,353.50, its strongest level since September. Gero says the most recent rise occurred as the dollar index fell below 90. 

Holdings of gold by global exchange-traded funds have hit the highest level in nearly five years, says SP Angel. The metal has rallied for five straight sessions, and investors have been moving into gold ETFs, the commodities brokerage says. The ETFs track the price of the metal but trade like a stock. “The precious metal is up almost 3% in the spot market this year, sustaining the surge throughout 2017 as the dollar continues to slide,” SP Angel says. “The total known holdings in bullion-backed ETFs rose to 2,254 tonnes as of Tuesday, the highest since May 2013.” Commerzbank analysts say Tuesday marked the sixth daily inflow in a row, with holdings now up by 30 tonnes since the beginning of the year. 

The dollar remains weak, with the latest wave of selling brought on by comments from U.S. Treasury Secretary Mnuchin, BBH says. Analysts note that while in Davos, Mnuchin was quoted as saying: “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” BBH points out that Treasury secretaries since Robert Rubin (1990s) have never deviated from the strong-dollar mantra. “That mantra has never really meant much, but to deviate from it suggests that U.S. policymakers desire a weaker dollar,” BBH says. “Rubin started this ‘policy’ after his predecessor Lloyd Bentsen used the exchange rate to pressure Japan into opening its markets. Mnuchin's comments pack an even bigger punch coming after the U.S. trade actions announced this week.” BBH points out that the U.S. dollar has hit multi-year lows against the euro. Metals traders tend to monitor moves in the dollar since base and precious metals alike tend to trade inversely to the U.S. currency. 

Gold has drawn recent support from a weak U.S. dollar and this may well continue, says Alex Thorndike, senior precious-metals dealer with MKS (Switzerland) S.A. “Interestingly, the gold has shrugged off any correlation to moves in equities and rates for the time being and is moving more in sync with the dollar,” he says. “Given that the sell-off in USD looks to continue, for the time being, we see conditions remaining supportive for the metal.” Spot gold has hit a four-month high of $1,351.55 as the dollar hit a three-year low. 

By Allen Sykora For (Kitco News)


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