The demand for gold has increased again as the bulls love high inflation. Gold prices rose as US inflation rose to the highest level since 1990. Cryptocoin. com, as the Fed keeps interest rates low, this also increases the demand for a hedge.
The relationship between gold prices and inflation
While rising inflation has been bad news for gold for most of this year, it is now giving a boost to the precious metal’s rise. While bullion is often bought as a way to protect wealth as consumer prices soar, this year’s inflation has weighed on the metal, as investors claim it will spur the Federal Reserve to withdraw major stimulus measures. But fears of out-of-control inflation are adding to gold’s appeal as unemployment soars, with the Fed determined to keep rates low. That was Wednesday, the day gold bounced off its 15-month downtrend after data showed U.S. consumer prices rose the fastest since 1990. On Thursday, spot prices were 0% before cutting some of the gains. It went up to 9. Nicky Shiels, head of metals strategy at MKS (Switzerland) SA, said inflation was “not temporary”. Analyst: “It injected some bullish momentum. “This means a change from the previous ‘thinking’ as the threat of the Fed’s contraction is gone,” he said.
The latest rally of gold shows that the Fed, which announced the pace of the market reducing its bond purchases last week, does not currently expect to do much more to fight inflation. This creates a favorable environment for the precious metal, as inflation erodes bond yields, which are kept under control by stimulus measures, and brightens the appeal of non-interest-earning assets like gold. Gold bullion fell below $1,700 an ounce by mid-August amid concerns over Fed tightening, pushing its 2020 record high decline to nearly 19%. Prices rose 0.6% at 11:18 p.m. in New York at $1,859.99, approaching their highest level since June.
Watch out for the Fed
Of course, the metal was trading just below a key resistance level before Wednesday’s US inflation report, and some of the gains may have been due to technical buying. Attention is now turning to comments from Fed officials on how they will respond to the pressure. “We expect the Fed to signal a faster contraction at its meeting next month,” said Citigroup Inc analyst Aakash Doshi. Contrary to prices, purchases through exchange-traded funds remain quiet and holdings are close to their lowest level since May 2020. More buying may be needed to keep the latest rally intact.
It is not only the USA that has seen inflation accelerate. The data also shows pressures in China, Japan and Germany are climbing the fastest in decades, and there are signs that are fueling fresh physical demand for gold. Alexander Zumpfe, a senior trader at the refinery company Heraeus Metals Germany GmbH & Co, said: “German private investors have reacted to the recent high inflation rates with increased demand. “We are seeing a significant increase in buying interest in gold bars.”