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Mitsubishi: Rising Inflation Could Impact Gold Investors Two Different Ways

Kitco News

(Kitco News) - Rising U.S. inflation could prompt contrasting reactions among gold-market participants, Mitsubishi pointed out in a report Monday.

Rising costs tend to mean higher Treasury yields that in turn underpin the U.S. dollar, thereby hurting gold. Yet, Mitsubishi also pointed out, there is also potential for some market participants to buy gold as an inflation hedge.

“The week ahead should bring some further clarity on whether expectations of higher interest rates are justified by rising inflation – core personal consumption expenditure inflation, the Fed’s preferred measure, today came in at 1.9%, the highest since 2016 and tantalizingly close to the Fed’s 2% target,” Mitsubishi said.

“Though rising inflation implies higher interest rates, for gold there is potential upside from investors buying the metal as an inflation hedge.”

In fact, Mitsubishi pointed out, while gold fell last week due to the macroeconomic environment and an easing of geopolitical concerns after a summit between the leaders of South Korea and North Korea, the metal also avoided a capitulation, such as in December when similar circumstances were in place.

“One reason that gold is holding up, and may continue to do so, is that the rally in yields is underpinned by expectations of higher inflation – with crude oil at three-year highs and the Fed’s preferred measure of inflation heading towards 2%, investors may increasingly be looking to hedge rising prices with some gold in their portfolio,” Mitsubishi said.

Additionally, the firm said, there is some uncertainty about the stock market, with some wondering if a “sugar rush was already baked into share prices,” thereby meaning potential for gold buying as a hedge.

The U.S. Federal Open Market Committee meets this week. Financial markets are not expecting an interest rate hike. Still, any hawkish comments on inflation and the future direction of rates likely would lift yields and could weigh on gold, Mitsubishi said.

The firm pointed out that gold historical inverse relationship with Treasury yields was on display last week, as gold prices fell as 10-year yields rose above 3% for the first time since 2014.

“However we note that the spread between two- and 10-year Treasury yields, widely seen as a harbinger of recession, has continued to narrow and is now at the lowest since 2007, where it was on the eve of the economic crisis,” Mitsubishi said. “In this environment, risk hedging may continue to support gold.”

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