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The battle of wills as inflation rises

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(Kitco News) - The sentiment is improving in the precious metals market, but the tug of war between the global economic recovery and inflation is far from over.

Unfortunately, a new dynamic is now starting to assert itself within financial markets. First, a little background: bond yields have been rising sharply since the start of the year because of growing expectations that the U.S. will see a strong recovery from the COVID-19 pandemic. Those expectations were reaffirmed this past week when the International Monetary Fund significantly increased its economic growth forecasts.

The IMF now sees the U.S. economy growing 6.4% this year, up from its previous estimate of 5.1%. The global economy is expected to grow by 6%. These are the best growth rates the U.S. and the world have seen in decades.

According to many economists, it makes sense for bond yields to creep higher in this environment. However, the new dynamic impacting bond yields is rising inflation. Friday, the Bureau of Labor Statistics said that its Producer Price Index increased 1% in March. For the year, producer inflation increased 4.2%, the biggest jump in price pressures in nearly a decade.

Economists pay close attention to producer prices because they are leading indicators. Companies pass on their higher production costs to consumers.

Usually, this would be positive for gold as it is seen as a traditional hedge against inflation. However, some market players are starting to worry that the looming inflation threat could quickly spiral out of control, and that would force the Federal Reserve to raise interest rates sooner than expected.

It's now a battle of wills in the marketplace. Can Jerome Powell and the Federal Reserve keep inflation expectations anchored at 2%? He is trying his best. In a panel discussion during the IMF's biannual meeting, he reiterated his stance that these inflation pressures will be transitory.

"Many economies around the world, at least for the last decade, have been unable to reach 2% inflation. Some are actually fighting off disinflation, and that has been the dominant set of dynamics about inflation for some decades," he said during the discussion. "Now, we have a situation where the economy is re-opening, there's a surge in demand, perhaps, there will be bottlenecks, but it seems unlikely that will change the underlying inflation psychology that has taken deep roots over many, many years."

Some analysts have noted that the looming threat of inflation is prompting some investors to store their wealth a little closer to home. Although the price of gold has seen a dismal start in the first three months of 2021, many investors have used the lower prices to load up on physical gold and silver bullion.

This week both the U.S. and Perth Mints reported unprecedented demand for their coins. The U.S. Mint said it sold 412,000 ounces of gold in various denominations of American Eagle Gold bullion coins. This was the mint's best quarter since 2011. Meanwhile, the Perth Mint said it sold 330,000 ounces of gold in the first three months of the year, its best quarter on record.

Although gold is struggling, investors should not completely dismiss the precious metal as an important tool in their portfolio.

That is it for this week. Have a great weekend.

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.