A week in gold: Inflation may keep gold pot bubbling
New York (Mar 19) "That gold has broken above its 200-day moving average is an indication of a change in longer-term trend."Gold is a traditional inflation hedge
Any doubts that gold's rally this year was unsustainable seem to have been blown away by the cautious comments from Federal Reserve after its latest meeting.
At least, that is the view of ABN Amro that has suggested some commentators still can’t get their head around how the situation has changed for the precious metal.
“Often in an information overkill environment, investors have a tendency to look for information that confirms their view,” it said this week.
The broker added there are things that even the bears cannot deny.
First, that gold has broken above its 200-day moving average is an indication of a change in longer-term trend.
While this may be an unreliable trading signal, as an indicator of a new trading range it does do well the broker believes.
ABN Amro is also critical of the view that gold will go lower as the US dollar rallies and US rates go up.
“We think that the multi-year bull trend of the US dollar has come to an end and official rates in the US will only go up gradually.
“Usually this will be negative for gold prices. However, gold prices will be supported if real yields move lower and/or into negative territory.”
Add in the possibility of a pick-up in inflation, which will boost gold’s credentials as an inflation hedge, the solid support at US$1,125 per ounce and central banks around the world adopting very loose monetary policies and the attractiveness of gold as investment is rising suggests the broker.
ABN Amro has raised its average price for the year to US$1,214, with the price for 2017 now US$1,300.
Capital Economics said the Fed’s dovishness at its March meeting was an additional factor boosting prices but the potential for a tick-up in inflation is even more important.
Like ABN Amro it expects gold’s recent rally to be extended further.
“While the extended period of loose monetary policy has certainly played a role in the recent rise in the gold price, this year’s game-changer has been the rebound in expectations for US inflation.
“This in turn is due partly to the pick-up in core CPI inflation and partly to the rebound in global oil prices.
“Indeed, there has been a strikingly close fit between changes in the cost of crude and the price of gold.
“This supports our view that the gold price can still rally further even if the Fed tightens policy by more than the markets currently anticipate. “
Over the past week, spot gold added a few dollars to US$1,255, but that masks a strong rebound on Wednesday after the Fed meeting when the price jumped US$30.
Source: Proactive-Investor
