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Gold Momentum To Hold as Inflation Goes AWOL - ICBC's Tom Kendall

Kitco News

(Kitco News) - Gold prices are finally trading in the green on Friday after a four-week losing streak, and one analyst says the momentum seems likely to continue.

“The biggest threat to our benign [gold] outlook would be more aggressive tightening by the Federal Reserve,” wrote Tom Kendall, precious metals strategist for ICBC Standard Bank, in a report Friday.

“However, with uncertainty about the composition of the FOMC, as well as the unsolved puzzle of just why inflation has gone AWOL, that is more of a threat for the back end of 2018.”

Gold pushed higher Friday after the release of weaker-than-expected U.S. inflation data, which put pressure on the U.S. dollar. Gold futures are heading towards their first positive weekly close in five weeks, last trading at $1,303.50. Meanwhile, the U.S. dollar index fell to 92.94, down 0.16% on the day.

Even if the Fed is on a slow tightening path, there are just too many “offsets” working in the metal’s favor right now, Kendall suggested.

“With inflation still subdued it appears that the US is heading back to consistently positive real rates. All else being equal that presents a major headwind to the gold price,” he noted. “However, there are significant offsets that seem likely to counter that downward pressure over the next six to 12 months.”  

Kendall believes the U.S. dollar pressure could continue as “global reserve managers are overweight USD.”

“The trend appears to be to diversify again. We don’t expect direct diversification into gold but a rotation out of USD into EUR and JPY would benefit gold indirectly,” he explained.

Likewise, “if medium term inflation expectations do start to rise then gold should perform better than longer-dated Treasuries,” he said.

Kendall even looked at retail demand from the two largest gold-consuming nations – India and China.

“Gold has been sustained above $1,200 for much of the past two years despite a recession in the Chinese jewellery industry and multiple policy challenges to the Indian market,” he wrote. “There are tentative signs of improving sales in the former, while a period of policy stability would definitely benefit the latter.”

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