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Stagflation might not be enough to save gold - Bank of America

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(Kitco News) - The gold market remains trapped below $1,800 an ounce and even the rising risk of stagflation will not be enough to support prices in the short term, according to analysts at Bank of America.

In a report published last week, analysts note that the precious metal continues to face significant headwinds as central banks push forward with plans to normalize monetary policies.

Gold prices last traded at $1,765.40 an ounce, down 0.16% on the day.

The analysts said that what makes the current stagflation threat different from other periods that were bullish for gold is that the labor market continues to hold up relatively well. They noted that not all stagflation periods are the same.

"We measure stagflation using the 'Misery Index,' a combination of inflation and the unemployment rate. While misery triggered two gold bull markets between 1971 and 1981, gold quotations and the 'Misery Index' have diverged in recent months. In fact, the 'Misery Index' still remains below the level of 12.5%, which pushed the yellow metal higher on a sustained basis in the past.

Although the global supply crunch is pushing energy prices higher along with inflation, Bank of America said that prices are below levels that have previously caused problems for the global economy. In the 1970s high energy prices contributed to stagflation. Since the start of this year, West Texas Intermediate (WTI) crude oil prices last traded up 70% to $82.51 per barrel.

"Spiking oil prices are adding macro volatility too, but inflation is mostly perceived as transitory. And tightening output gaps should push central banks towards normalizing policy rates," the analysts said. "Oil demand and prices could push higher from here over… Yet, that needs to play out, before gold would take a bid."

The analysts said that rising inflation is pushing both nominal and real interest rates higher, which are increasing gold's opportunity costs. Bank of America expects U.S. bond yields to rise to 1.90% by the fourth quarter of 2022. At the same time, U.S. CPI is expected to be around 2.4% by the end of next year.

Although gold prices face some near-term headwinds, Bank of America does see some potential for the precious metal as interest rates are expected to remain low as government debt has ballooned through the COVID-19 pandemic.

"Our colleagues in rates research recently outlined that the level of outstanding debt and the amount of debt servicing expense an economy can tolerate are important drivers of the ability to raise rates," the analysts said.

The analysts said that bond yields could be capped at 2% before causing problems for the U.S. economy and equity markets.

"With CPI inflation likely staying above 2% near-term, this implies that negative real rates may remain a reality going forward," the analysts said.

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.