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Gold price remains constructive as inflation rises - Haywood Research

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(Kitco News) - The gold market is in a precarious position as inflation and interest rate expectations continue to dominate the marketplace. However, growing uncertainty in global financial markets supports the precious metal, according to one investment firm.

In its latest precious metals forecast, analysts at Haywood Research slightly increased their outlook for gold and silver through 2021. The firm said that it sees gold prices now averaging the year around $1,815, up 0.8% from the previous forecast.

"Gold remains a tangible, fungible, and durable product and store of value. We believe the precious metals complex is in a long-term uptrend and the recent breakout from the recent March 2021 lows supports this view, while ongoing longer-term macro-economic factors remain constructive," the analysts said.

The bullish outlook on gold comes as the price continues to struggle to find new buying momentum even as U.S. Treasury yields fall back to their lows at the start of the year. 10-year yields last traded at 1.16%. At the same time, real yields, which include inflation, are trading below -1%.

Some analysts have noted that gold isn't reacting to bond yields as the U.S. dollar shows some resilient strength.

Analysts at Haywood said that financial markets are in a difficult situation as they reacted to rising inflation pressures and shifting interest rate expectations. Although inflation is pushing higher, the analysts noted that interest rates have only so much room to move up before it threatens the current recovery.

"In order to control inflation, rates would need to rise, but that, in turn, increases interest on U.S. debt, driving the deficit even higher," the analysts said.

The analysts added that inflation remains a critical element for long-term gold prices.

"While the FOMC has said inflation is transitory and expected to recede, last year's move to 'average inflation targeting' allows the Fed to keep interest rates below inflation for a longer period of time. According to the World Gold Council, in years when the U.S. Consumer Price Index [CPI] was higher than 3%, gold had an annual average return of 15%," the analysts said.

Last week the U.S. Labor Department said that annual CPI rose 5.4%, its biggest increase since 2008.

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