FOCUS: Inflation Data Not Likely to Bring Joy to Gold Market Bulls

15 June 2010, 1:08 p.m.
By Debbie Carlson
Of Kitco News

Chicago -- (Kitco News) --Inflation data is in the spotlight this week and gold traders will be watching to see what effect, if any, the information will have on metals prices.

Given the historically-low interest rates in western economies and the stimulus money floating around, some market watchers are concerned about the possibility of inflation eroding the value of goods. Gold has traditionally been used as a hedge against rising inflation. Each month inflation data has been keenly watched to see if there are signs that prices are beginning to creep upward.

Right now, the expectation is that the bogeyman of rising prices is being kept at bay, and the first piece of data released Tuesday was true to form.

 U.S. import prices showed a drop Tuesday. The U.S. Labor Department said import prices fell 0.6% in May. This compares to a 1.1% gain in April, which was revised from the 0.9% rise originally reported. Versus a year ago, import prices gained 8.6%, down from April's 11.1% year-on-year increase.

The drop in import prices helped U.S. equity markets rise, overshadowing the downgrade of Greek government debt to junk status by Moody’s Investor Service. Gold prices were little changed Tuesday after the report, but later rose on some bargain hunting and on a continued safe haven trade, analysts said.

The key U.S. inflation reports – the producer price index and the consumer price index -are slated for release Wednesday and Thursday and are without a doubt a big focus for gold and other traders this week. Both reports are expected to be tame.

May’s producer price index, which measures wholesale inflation, is expected to show a drop in prices. Marketwatch says the consensus is for a 0.6% decline, after April’s 0.1% drop. The core is expected at 0.1%, versus 0.2% in April.

The consumer price index for May is expected to fall 0.2%, Marketwatch says. It fell 0.1% in April. The core, which excludes the volatile food and energy components, is forecast at 0.1% and was flat in April.

Market analysts said the headline figures for PPI and CPI should be down because of the steep drop in oil prices in May and that lowered gasoline and heating oil prices. Further, food prices have fallen a bit, also tempering the main figure. Yet because of this, the core figures might be slightly higher.

Standard Chartered said in a research note that there is little sign that inflation should change. “Industrial production and capacity utilization should show continued improvement but have a long way to go before inflationary pressures become a consideration,” the bank said.

The bank added that not only is inflation in the U.S. and western economies not an issue, so far it is remaining tame in Asia, where economic growth is picking up, although momentum is building. Still, they said, the turmoil in Europe may push back any central bank rate tightening until the end of 2010.

Jim Smitherman, a commodities broker at Coquest Inc., said the attitude in the markets concerning inflation is "steady as she goes."

He said inflation data is tame and should  remain so for the remainder of the year.  "I think the Fed will maintain its current policy for the foreseeable future. Commodity prices in general are lower over the last six months and barring a collapse in the dollar I would expect them to remain that way,"Smitherman said. "Those calling for inflation right around the corner have been doing so for 2 years now. How far away is this corner?  I think it is a long ways away.".


By Debbie Carlson, contributing to Kitco News;