Rising inflation has hindered the price of gold for most of this year, but it is now giving it a boost. Typically, bullion is bought as a wealth protection measure when consumer prices rise, but inflation has pressured the precious metal this year as investors bet it would lead the Federal Reserve to scale back its massive stimulus measures. However, with the Fed intent on keeping interest rates low amid persistently high unemployment rates, concerns about runaway inflation are increasing gold's appeal.
This became evident on Wednesday when gold prices jumped, reversing a downward trend that had persisted for 15 months, after data showed that consumer prices in the U.S. rose at their fastest pace since 1990. Spot prices also rose by 0.8% on Thursday.
Nikki Shiels, Head of Metal Strategy at MKS Switzerland, stated that inflation "is not temporary... it has injected some upward momentum, which is a shift from previous thinking as the threat of the Fed easing stimulus fades."
The recent rise in gold indicates that the market does not expect the Federal Reserve, which announced last week a pace for tapering bond purchases, to do much to address inflation currently. This creates an ideal environment for the metal, as inflation erodes bond yields constrained by stimulus measures, enhancing the appeal of non-yielding assets like gold.
Gold fell below $1,700 per ounce in mid-August, down 19% from the record high seen in 2020 due to fears of the Fed tightening policy. Prices rose by 0.6% to $1,861.42 per ounce at 10:30 AM in London, close to its highest level since May.
**Federal Reserve Focus**
The metal was trading directly below a key resistance level before the U.S. inflation report on Wednesday, and some of its gains may be due to technical buying. The focus is now on any statements from Fed officials regarding their response to the new figures.
Akash Doshi, an analyst at Citigroup, stated, "We expect the Fed to indicate a faster pace of tapering" at its meeting next month. He added that short-term bond markets now reflect a quicker interest rate hike, "which may imply temporary or slow buying of gold as we enter winter."
ETF buying remains weak compared to price trends, with holdings near their lowest level since May 2020. Maintaining the recent upward momentum may require further buying.
The U.S. is not the only country experiencing accelerating inflation, as data also shows that readings in China, Japan, and Germany are rising at their fastest pace in decades, with indications of new physical demand for gold.
Alexander Zumbfieh, chief trader at Heraeus Metals Germany, noted, "German private investors have already responded to the latest rise in inflation by increasing demand for the metal... we are seeing a significant increase in interest in purchasing gold bullion."
