For much of this year, rising inflation has been bad news for gold. Now it’s giving the metal a shot in the arm.
While bullion is often bought as a way to protect wealth when consumer prices are climbing, this year’s inflation had weighed on the metal as investors bet that it would spur the Federal Reserve to scale back huge stimulus measures. But with the Fed determined to keep rates low while unemployment remains elevated, worries about out-of-control inflation are boosting gold’s allure.
That was clear on Wednesday, when gold jumped to break out of a 15-month downtrend after data showed U.S. consumer prices rose the fastest since 1990. On Thursday, spot prices rose as much as 0.9%, before paring some of the gain.
Inflation “is not transitory,” said Nicky Shiels, head of metals strategy at MKS (Switzerland) SA. “It’s injected some bullish momentum. That’s a change from the previous ‘thinking’ since the Fed’s taper threat is out of the way.”
Gold’s recent rally shows that the market doesn’t expect the Fed -- which last week announced the pace of its bond-buying tapering -- to do much more to tackle inflation right now. That’s creating a Goldilocks environment for the metal, where inflation erodes bond yields that are kept in check by stimulus measures, burnishing the appeal of non-interest bearing assets like gold.
Bullion had slumped below $1,700 an ounce by mid-August -- taking its decline from 2020’s record high to about 19% -- on worries about Fed tightening. Prices were up 0.6% at $1,859.99 an ounce by 11:18 a.m. in New York, near the highest since June.
