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US Bank’s Haworth: Not Expecting Deflation At This Point; Negative On Gold

By Debbie Carlson of Kitco News
Tuesday August 19, 2014 3:30 PM

(Kitco News) - Subdued consumer inflation data, sluggish wage growth and falling commodity prices have some market watchers concerned about potential deflation, but an investment strategist at a top U.S. bank says he’s not worried.

The July consumer price index rose 0.1% from a month earlier, while the core CPI, which excludes the more volatile food and energy also only rose 0.1%, half of expectations; annual core CPI remains under the Federal Reserve’s 2% target. Additionally, the S&P GSCI, a commodity index, is down about 7.8% for the year. Inflation-adjusted wage growth over the past 12 months has only inched up 0.3%.

Yet Rob Haworth, senior investment strategist, U.S. Bank Wealth Management, said these indicators are not signaling further price drops. That’s because he sees the U.S. economy growing, and he thinks certain commodities like crude oil will rise, but gold prices could sink.

“We’re not expectation a deflationary scenario in the U.S. at all at this point. If we’re wrong, we’d have to be wrong about the state of the global economy and see more declines in commodities in general. For the U.S. in particular, the health in the in employment sector means we’re not particularly worried.

“There are problems elsewhere and the decline in food prices is certainly having an impact on, say inflation in the eurozone, and that’s going to make the ECB’s (European Central Bank) job harder.  (But)  the Russian/Ukraine issue may work itself out later this year anyway. They might not have a deflation problem as they get into winter at all,” he said.

Haworth said U.S. Bank sees the U.S. economy growing and eventually that should help to support crude oil prices as demand picks up. So far, though demand has not grown as he expected.

While he’s bullish on crude oil prices, he’s bearish on gold, based on the idea that the U.S. economy will grow.

“With our thesis of an improving global economy, that also means the end of the Fed’s quantitative easing program, (and they will) probably raise interest rates at some point. This is all negative for gold, including better economic growth…. I say that, and what, gold is up 7% this year? It’s not as strong as it was, and it’s clearly not in a new bull market phase, but it clearly has support,” he said.

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Geopolitics Lends Only Some Support

While gold and crude oil prices have found occasional support from geopolitical headlines, such as the tensions between Russia and Ukraine or the militant groups fighting in Iraq, the strength rarely lasts. Several analysts have questioned why these two commodities haven’t seen more geopolitical premiums worked into prices.

“I’ve said the same thing myself. ISIS enters Iraq, and it starts moving to Bagdad, and you get $5 rise in the price of oil. It was amazingly modest. I haven’t studied this at all, but part of it could be the change in the commodity investor universe through (greater) regulation, and part of it is we’re in a completely different global supply situation,” he said.

Haworth said crude oil supplies have stayed surprisingly strong despite sanctions on Iran, problems in Libya and the militant fighting in Iraq.

“We have as well-balanced a market as we’ve seen in sometime. Part of that is energy efficiency, part of that is exploration innovation with the imaging technology combined with fracking. That’s been the amazing thing,” he said.

The gold market, on the other hand, might just be “tired,” he said. “I think the market is a little tired. A lot of participants have exited. You’re not getting any support from physical demand really out of Asia. India still has higher tariffs,” he said.

Low volatility might be to blame, he said, and there might not be much to change there.

“We don’t see a catalyst to change that. The world’s problems, even with the problems we’re having, the problems are fairly well contained. Iraq is contained … our involvement is much more modest. Regarding Russia/Ukraine, our direct involvement is zero. That means we won’t get the volatility we used to. It can stay like this for a while, but I don’t think it will be long-term,” Haworth said.

By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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