Rising Inflation Could Be Game Changer For Gold In 2016 - Capital Economics
Tuesday December 15, 2015 12:24
(Kitco News) - Inflation could be the game changer gold needs for 2016, something that the market hasn’t seen in a while, according to one U.K.-based research firm.
Julian Jessop, head of commodity research at Capital Economics, said in a recent interview with Kitco News that he is expecting inflation to pick up in 2016 compared to 2015; he added that this is known as the base effect.
Inflation was almost non-existent in 2015 as oil prices were 50% lower compared to the previous year. Although oil prices remain weak, hitting new multi-year lows almost on a daily basis, Jessop said that the firm isn’t expecting to see another 50% collapse in crude oil.
According to the latest government data, the U.S. Consumer Price Index is currently hovering around 0.5% for the year; stripping away volatile food and energy costs, core inflation has risen 2.0% for the year . However, the Federal Reserve’s preferred inflation measure is the core Personal Consumption Expenditures index (PCE), which excludes volatile food and energy costs and is hovering at 1.3%.
In a recent report, Capital Economics noted because of the slight difference between the two indexes a PCE reading of 2.0% equals a CPI reading of 2.3%. However, the firms notes that both indexes are showing a rising trend in price pressures.
“Inflation picking up is going to be the key for gold in 2016, because that is the one factor that is genuinely new,” he said.
Capital Economics is one of the most optimistic in the marketplace as the firm expects prices to end next year at $1,400 an ounce. However, Jessop admits that 2016 won’t be without its challenges, specifically, potential U.S. dollar strength.
While inflation expectations could be the most interesting factor for gold, Jessop said that it is still only one part of the market. He explained that investors also need to see a weaker U.S. dollar in 2016 before they are comfortable jumping back into the gold market.
“It would be very difficult for gold to rally if the U.S. dollar continued to strengthen at the same pace it has through 2016,” he said.
Jessop said that the firm is expecting the U.S. dollar to top in 2016 as markets adjust to the Federal Reserve’s expected gradual hiking cycle.
Capital Economics has slightly more aggressive expectations for U.S. interest rates. But Jessop said that investors should look at the reason why the Fed will have to raise interest rates. He explained that higher inflation expectations will prompt the central bank to act more aggressively, which would be positive for gold, which has traditionally been seen as an inflation hedge.
The firm is forecasting that the Fed funds rate will end next year between 1.75% and 2.00%, higher than the Fed funds futures rate, which is forecasting a range between 0.75% and 1.00%; and higher than the central bank’s own projections, which range between 1.25% and 1.50%.
Jessop added that the Fed’s new rate hike cycle in 2016 could also help to stabilize the global economy, prompting increased demand from emerging markets and central banks.