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Tame Inflation, White House Drama Support Gold Prices

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(Kitco News) - Tame inflation pressures and further geopolitical uncertainty in Washington have helped breathe some life into an uninspiring gold market, according to some analysts.

The gold market jumped into positive territory after the U.S. Labor Department said its U.S. Consumer Price Index rose 0.2% in February, in line with expectations. The precious metal caught another bid after news broke that President Donald Trump replaced U.S. Secretary of State Rex Tillerson with Central Intelligence Agency Director Mike Pompeo.

April gold futures are holding on to positive gains -- just off session highs – last trading at $1,326.10 an ounce, up 0.40% on the day.

Bill Baruch, president of Blue Line Futures, said that he expects gold prices to continue to firm as the metal finds support as a safe-haven asset and benefits from shifting interest-rate expectations. Ultimately, he added that the inflation data will prove to have a more lasting impact than the news from the White House.

“The CPI data puts a bigger focus on last week’s disappointing wage inflation,” he said. “The data show that inflation isn’t going anywhere very quickly.”

Looking the latest announcement from President Trump, Baruch said that is not a significant shift in the government.

“The head of the CIA is replacing Tillerson,” he said. “While there is some uncertainty, I think this will be a smooth transition.”

Trump’s announcement comes less than a week after he agreed to meet North Korean leader Kim Jong Un. The news also highlights ongoing high-level departures in the White House, as Tillerson’s ousting comes a week after senior White House economic advisor Gary Cohn said he was leaving.

Jim Wyckoff, senior technical analyst at Kitco.com, agreed that the inflation data will have more impact on gold prices in the long run.

“I think gold's main impetus to the upside this morning was the tame reading on U.S. inflation, as the consumer price index report was in line with market expectations and did not produce a 'hot' inflation number,” he said. “However, the news of Tillerson being out as U.S. Secretary of State did add a bit of a safe-haven bid for gold and silver."

According to economists, while the CPI data was in line with expectations, across the board, the overall inflation picture remains muted.

Avery Shenfeld, senior economist at CIBC World Markets, said that the latest inflation data do not support aggressive interest-rate hikes this year. Only two weeks ago, markets were starting to price in the possibility of four interest rate hikes this year.

“With core PCE prices still comfortably below target, the Fed has no reason to get any more aggressive on rate hikes than its current dot-plot forecast already builds in,” he said.

While gold still faces a hurdle of an interest-rate hike next week, Baruch said that he sees gold a buy around $1,320 an ounce. He added that he sees long-term potential for the yellow metal.

“While the Federal Reserve is not likely to be dovish, it is not going to bring the hawkish heat that markets were expecting only a few weeks ago,” he said.

While some analysts expect markets to focus on inflation data, currency analysts at TD Securities said that they think currency markets could focus on the White House drama, dragging the U.S. dollar lower, which would be positive for gold prices.

“The CPI reading left little for FX markets to chew on and instead may show greater deference to US political developments in the very near-term,” the analysts said.

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.

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