Gold needs higher inflation to rally
Published on 05.10.2018 12:06

After climbing in yesterday’s trading session back through the $1200 mark on the back of inflation worries, the gold price has once again pulled back as traders await today’s all important Non-Farm Payrolls figure from the US.

This economic news is seen as one of the main barometers in heling the US Federal Reserve deciding whether to lift interest rates any further this year so a strong reading today is likely to put pressure on the gold price at the expense of the US dollar.

Investors are currently enjoying the yields the US dollar currently provides which is something that gold does not give and is only valuable as a capital-gaining asset.

"A robust NFP non-farm payroll print coupled with signs of rising wage growth could fuel expectations over the Fed tightening policy faster than projected," said Lukman Otunuga, Research Analyst for FXTM.

"This is bad news for zero-yielding gold which losses attraction in a high-interest rate environment."

Some say the main hope for gold at the moment is rising inflation which is currently happening in the US as well as a number of other countries, and this factor may see money move into the precious metal as a safe haven investment to protect themselves against rising costs.

The room for further rate hikes is getting limited because the present level of the Fed funds rate is getting closer to neutral rate, estimated at 3 per cent by the FOMC members. That is why the Fed has removed “accommodative” word this time from the statement. This should drive the dollar lower thereby pushing gold prices higher.

The room for further rate hikes is getting limited because the present level of the Fed funds rate is getting closer to neutral rate, estimated at 3 per cent by the FOMC members. That is why the Fed has removed “accommodative” word this time from the statement. This should drive the dollar lower thereby pushing gold prices higher.

 “Other world government bond markets are also seeing their yields rise, in sympathy to the U.S. This is yet another clue that creeping price inflation could become problematic down the road,” said Kitco Metals senior analyst Jim Wyckoff . “That’s a bullish scenario for hard assets like raw commodities, and bearish for paper assets like stocks and bonds.” He added.


Andrew Masters

Analyst

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