If you caught our special report on Wednesday which focused on the great inflation gold rush, you’ll already know that the yellow metal is poised to be in much higher demand as inflation continues to wreak havoc. Today, we are seeing that being born out in full force, with gold pushing key resistance levels and trading above £1,345 ($1,826) as US levels of inflation push a forty-year high.
The official January data confirms that inflation is now running at an annual rate of 7.5% – a figure that we haven’t seen since 1982. Core inflation, which is now measured at 6.0% is also at its highest point in forty years and both measures seem certain to be higher still when the February data is published next month.
These levels of inflation, confirmed in Thursday’s U.S. Consumer Price Index issued by the U.S Labor Department were higher than economists expected to see but the overall trend continues to be upwards, with the report noting, “This was the seventh time in the last 10 months it has increased by at least 0.5 percent.”
St. Louis Fed president James Bullard called for immediate action, saying that interest rates should immediately be increased in order to dampen down inflation. A steep rate hike is now thought likely when the FOMC meeting takes place next month. This leaves Wall Street in a precarious position, with markets juddery – and a win-win situation for gold.
Amidst such uncertainty, it is thriving as a non-risk asset and already making price gains. Should a sudden tightening of interest rates occur, it also stands to benefit long term – as we reported on Wednesday, that could lead to a stalling of economic recovery, put pressure on the job market and in years past, has been shown to lead to recession.
Katherine Judge, senior economist at CIBC Economics said, “The Fed needs to act swiftly to contain inflation, as wage pressures have only strengthened in recent months. Inflation will likely accelerate further above the 7.5% mark next month, while core inflation is also set to accelerate, as higher energy prices combine with base effects and strong demand in core categories.”
Edward Moya, senior market analyst at OANDA says gold is now the smart choice and poised to go higher, noting “If the 10-year Treasury breaks above the 2.00% level, gold could see some short-term weakness, but nothing that should signal the beginning of a bearish trend. With inflation hitting more categories, gold could start behaving more like an inflation hedge as the flattener trade will likely limit the dollar’s gains going forward.”
