Ignore Fed tapering, gold investors need to focus on inflation and real interest rates - Commerzbank
(Kitco News) - The gold market is making a move back towards $1,900. And with inflation on the rise, one bank said that precious metals investors don't have to fear the Federal Reserve adjusting its ultra-loose monetary policy.
In a report Monday, Carsten Fritsch, precious metals analyst at Commerzbank, said he remains bullish on gold despite the near-term volatility. He added that he will be closely watching Thursday's Consumer Price Index (CPI) data as the bank expects inflation is just starting to rise.
"Companies are reporting rising input costs and disrupted supply chains. Our economists, therefore, expect the inflation rate to continue climbing for now and to remain at a very high level into the third quarter before it then begins falling again," he said.
As a result, Fritsch said that the German bank expects the Federal Reserve to start reducing its bond-purchase program by the fourth quarter, a lot sooner than markets have been expecting.
However, he added that gold investors need to keep an eye on real interest rates, even as the Federal Reserve slows the expansion of its balance sheet.
"We will have to wait a lot longer for [rate hikes] to be forthcoming. Nominal yields will therefore remain well below the inflation rate for some considerable time, leaving real interest rates significantly negative. This is a strong argument in favor of a rising gold price," he said.
The comments come as U.S. real yields on 10-year notes traded at negative 84 basis points on Friday.
Last month's annual headline CPI increased 4.2%, its largest increase since September 2008. At the same time, core CPI, which strips out food and energy prices, rose 3%.
Looking ahead, consensus forecasts expect inflation to rise 4.7% in May.
Not only are consumer price pressures are rising, but Friday's nonfarm payrolls report noted rising wage pressures. Average hourly earnings increased 0.5% last month, following a 0.7% rise in April.
Although the Federal Reserve forecasts that current inflation pressures will prove to be transitory, some economists have said that wage inflation could prove to be a lot stickier than expected.