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Inflation threat can drive gold prices back to $1,830

October 25, 2021 00:00:00

LONDON, Oct 24 (The Hindustan Times): The growing inflation threat remains the most extensive support for the gold market as analysts see the potential for prices to test critical resistance around $1,830 in the near term.

Friday morning, gold prices pushed to a six-week high as rising inflation pressures have pushed breakeven rates in the five-year bonds to their highest level in a decade. The breakeven rate is the difference in yields between bonds and Treasury Inflation-Protected Securities (TIPS). The difference represents the inflation rate needed to equalize their returns.

However, gold lost some significant ground, falling $30 in a matter of minutes after Federal Reserve Chair Jerome Powell tried to talk down the rising inflation threat.

In an online conference hosted by the South African Reserve Bank, despite significant sound issues, Powell reiterated his outlook that the US central bank is on track to reduce its monthly bond purchase before the end of the year. He added that the monthly purchases are expected to end by mid-2022.

However, not all analysts are convinced that Powell and the US central bank will be able to resolve the growing inflation expectations.

Daniel Pavilonis, senior commodities broker with RJO Futures, said that the rise in yields could indicate that inflation expectations are becoming unanchored and with economic activity starting to slow, the Federal Reserve will have limited tools.

"I don't think the Federal Reserve has the ability to bring inflation back under control," he said. "We are seeing the risk of stagflation continue to grow and that will be good for gold and all commodities. Gold will do well as investors will see it as a value play."

Wade Guenther, managing partner at Wilshire Phoenix, said in a recent interview with Kitco News that he also doesn't see the Federal Reserve getting ahead of the inflation curve.

Guenther explained that inflation is currently being driven by the continued disruption of the global supply chain. He added that the supply crunch could last longer than is initially expected, which means inflation will remain elevated.

"There is nothing the Federal Reserve can do to fix the supply chain," he said. "This is not inflation driven by consumer demand."

Although he remained relatively positive on economic activity, Powell noted a growing risk that the supply-chain disruptions persist longer than expected, which could keep inflation high through 2022.

However, he added that the base case is for the supply bottlenecks to be resolved and for inflation to fall back to 2 per cent.

Inflation is also a growing global problem. This past week Canadian data showed that consumer prices rose to their highest level in 13 years last month.

In Britain, inflation pressures remained elevated and above the Bank of England's target for a second consecutive month.

While inflation pressures continue to support gold prices, analysts note that the dynamic has changed slightly as the precious metal faces new competition, particularly from Bitcoin.

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