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Mitsubishi: Inflation Cross-Currents For Gold; Palladium Premium Shrinking

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(Kitco News) - Gold would face some cross-currents from rising inflation expectations, benefitting as an inflation hedge but also facing potential selling as Treasury yields rise, says Mitsubishi in a weekly report on precious metals.

Meanwhile, strategist Jonathan Butler points out that palladium’s premium over platinum is slowly disappearing.

Global equities sold off sharply at the start of the week and the so-called VIX “fear index” reached its highest level since 2015. Against this backdrop, Butler commented that it was “surprising” that gold drew only “limited” support on safe-haven buying, but also pointing out that the metal ran into headwinds from a stronger U.S. dollar at the same time.

“This correction in stock markets may turn out to be short-lived since the economic fundamentals remain strong, with U.S. and euro-zone GDP [gross-domestic-product] growth rising, while the full benefits of U.S. tax reform have yet to be felt,” the strategist said.

He pointed out that new Federal Reserve Chair Jerome Powell is expected to maintain predecessor Janet Yellen’s policy of raising interest rates gradually. The Fed funds futures are factoring in a 90% probability of a 25-basis-point rate hike in March, which Butler says the gold market has largely priced in already. The Fed’s projections are for three hikes this year.

“If broad measures of inflation significantly pick up, matching the uptick in the hourly earnings reading on Friday, then the Fed will be justified in raising rates more quickly, which would weigh on gold as a non-yielding asset, though it would benefit to an extent as an inflation hedge,” Butler said.

“If, however, the recent jump in one measure of inflation turns out to be a transitory or seasonal effect, the Fed will be disinclined to get ahead of the curve and raise rates too quickly, keeping the macro environment reasonably favorable to bullion.”

Meanwhile, Butler pointed out that palladium – the strongest commodity in 2017 -- dropped for a third straight week last week and has continued its decline since, falling back below the $1,000-an-ounce level. As of 9:20 a.m. EST, spot palladium was down $22 to $989.80 an ounce, while platinum was down $8.10 to $978.90.

“While part of this is explained by the rise in the dollar and consequent downward pressure across the precious-metal complex, a sizeable short palladium/long platinum trade appears to have been at play after an unwinding of the opposite trade that prevailed in 2017,” Mitsubishi said. “Palladium’s premium against platinum is now down to less than 2%, having been over 15% back in mid-December, and we forecast platinum will move back into a premium this year.”

The decline in palladium prices has been accompanied by a significant decline in speculative length in Nymex futures, the firm points out. Meanwhile, Mitsubishi describes a recent decline in platinum prices as “limited,” with investors remaining “generally bullish.”

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