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Analysts To Gold Investors: Ignore Weak Inflation And Focus On Lower Real Rates

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(Kitco News) - Weak global inflation pressures will not be a major headwind for gold as data highlight growing risks to the global economy, according to some analysts.

Thursday, the Organization of Economic Cooperation and Development (OECD) said that global inflation in June fell to 1.9%. Inflation pressures have fallen dramatically from its April highs at 2.4%. While at first glance this could be seen as bad news for the yellow metal, which is traditionally seen as a hedge against rising price pressures, analysts point to signs why it can be good for gold.

Bart Melek, head of commodity strategy at TD Securities, explained that it is not the actual inflation data that drive gold prices, but how the numbers impact real interest rates. He noted that global inflation at 1.9% does not signal a very strong economy, which that will keep pressure on central banks to maintain accommodative monetary policies.

“If you have low interest rates then central bank will tend to maintain low real rates and that is what is important for gold,” he said.

While the Federal Reserve could be on track to raise interest rates one more time this year, Melek said there are new questions as to how aggressive the U.S. central bank will be in 2018.

“In this environment there are questions as to whether or not the Fed can raise rates another three time,” he said. “If inflation is low and inflation expectations fall, the Fed will not be in a hurry to raise interest rates next year.”

While TD Securities sees potential for another rate hike, markets are fairly reserved. CME 30-Day Fed fund futures are pricing in a 50/50 chance of a 25 basis-point hike by December. Markets are pricing in a about a 25% chance of one rate hike by August of 2018.

Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the annual In Gold We Trust report, said that he also doesn’t see low inflation as a major hurdle for gold. He added that in the current economic environment, he does not expect the Fed to raise interest rates again this year.

“I am extremely bearish on the U.S. economy and you can see weak growth in the inflation numbers,” he said. “I just don’t see much further room for economic growth in the U.S.”

However, Stoeferle added that gold will struggle in the near-term as it competes with record-breaking equity markets.

The latest global inflation picture come after former Fed Chair Allen Greenspan said in an interview with Bloomberg that he sees a rising risk of stagflation - an economy that sees low growth and high inflation.

“We’ve been in a period of stagnation since 2008 as a consequence of the sharp decline of capital investment and productivity growth,” Greenspan said in the interview. “But stagflation is about to emerge. We are moving into a different phase of the economy -- to a stagflation not seen since the 1970s -- that is not good for asset prices.”
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 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.