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Powell talks down inflation and gold follows

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(Kitco News) - As a gold investor, if you were expecting an easy end to what has been another relatively quiet week, you were unfortunately mistaken.

The day started with plenty of optimism in the precious metal market, with gold and silver prices soaring higher. Gold managed to push to a six-week high above $1,800 an ounce.

However, that initial optimism was short-lived after Federal Reserve Chair Jerome Powell talked down the growing inflation risks. Speaking during an online conference hosted by the South African Reserve Bank, despite significant sound issues, Powell said that the bank is on track to reduce its monthly bond purchase.

On the inflation threat, Powell said that although risks are growing, he expects that supply-chain issues will eventually be resolved and inflation will fall back to 2%.

Powell's comments caused gold prices to drop roughly $30 from their session highs. However, heading into Friday's close, gold investors are showing their grit as prices push back to within a few dollars of $1,800 an ounce.

Despite what Powell says, markets are seeing inflation as more than a "transitory blip." Companies worldwide are facing an energy crisis, supply-chain bottlenecks and labor market shortage. Some economists are expecting some of these issues to persist through 2022, which means inflation pressures, already elevated, won't be going down anytime soon.

We can see rising inflation expectations in the bond market as breakevens start to rise to multi-year highs. Five-year breakeven yields are at their highest level since 2004. Many commodity analysts expect gold to regain its luster as the Fed remains behind the inflation curve.

However, not all analysts are convinced that higher inflation and lower growth, also referred to as stagflation, will be positive for gold. In a recent report, Bank of America said that the current environment, despite higher inflation, is still not great for precious metals. 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," the analysts said.

So for now, we have to wait and see who will be right: the Fed or markets.

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.