Gold wins the fight between inflation and reflation - VanEck's Foster
(Kitco News) - The gold market is breaking its chain with interest rates as prices push back above $1,800 an ounce even as 10-year bond yields hold at their highest level in nearly a year, above 1.3%.
According to Joe Foster, portfolio Manager for VanEck’s active Gold and Precious Metals Strategy, the battle being waged in the precious metals market and in bonds is between reflation and inflation.
Although inflation pressures are picking up, they are being overshadowed by expectations that government and central bank stimulus measures will help the U.S. economy recover at a faster pace than current forecasts.
"There is a difference between reflation, which is stimulating the economy to get back to normal growth, and excessive inflation, which is a rise in wages and prices," said Foster in a report published last week.
Foster noted that although inflation expectations are rising, they are only returning to levels seen before the U.S. economy was devastated by the COVID-19 pandemic. Last year inflation cratered because of the deflationary impact of the virus, which caused governments around the world to close all non-essential services and businesses.
"Gold is not reacting to inflationary pressures because there is not yet any evidence of excessive inflation," he said.
Although inflation pressures are currently subdued, Foster said that could easily change if history is any indication.
"The Japan model makes a compelling case against inflation; however, the post-WWll model makes an inflationary cycle the most likely outcome, given the overwhelming stimulus efforts," he said. "The last time we saw such stimulus in the U.S. was in response to the depression and WW ll, which brought an inflationary cycle in which the annual change in the CPI peaked at 19.7% in March of 1947."
While rising inflation risks are the biggest bullish factor for gold, Foster added that risks related to low growth, low inflation environment could also support prices.
"Such risks include debt problems, even more radical fiscal and monetary policies, worsening income disparity and social unrest," he said.