(Kitco News) Inflation data, which was warmer than expected, kept gold in demand as prices broke the $ 1,980 per share level. ounce. But the “big test” of the precious metal has not yet come, according to MKS PAMP Group.
Markets are digesting inflation, accelerating to new highs for four decades in March after rising 8.5% from a year earlier. On top of that, the US producer price index (PPI) rose 11.2% from a year ago in March, posting yet another record.
Many economists predict that the figures for March will mark a peak in inflation, citing declining core inflation, base effects and some easing of supply chain problems.
Yet the gold market is still rising, without fear of an aggressive Federal Reserve. June Comex gold futures rose to $ 1,981.00 on Wednesday, up 0.25% on the day.
“If this is really ‘peak inflation’ combined with impending back-to-back Fed increases of 50bp, gold should be traded very defensively … it is not. Prices have risen by $ 30 since the CPI print as it leverages the simplistic view that the ‘high inflation prints = higher gold’ program instead of the ‘high inflation = hawkish Fed = lower gold’, “said MKS PAMP Group’s metal strategist Nicky Shiels.
The problem is that even though inflation is declining, it is still more than 8% compared to a year ago. “The reversal in (inflation growth) trend is a welcome sign economically, but sometimes the market loses overall levels of sight; pace and direction matter, but so do base levels,” Shiels said.
Base levels matter as they put everything in perspective, the metal strategist added, pointing out that even the Federal Reserve’s forthcoming qualitative easing (QT) will only be kicked off after the central bank’s balance sheet was allowed to expand to $ 9 trillion.
“Liquidity is withdrawn, [but] “It’s on a tight base – the $ 9 billion Fed balance sheet – which may explain why there has been no expected downturn in the risk markets,” she said.[Same with] rising real interest rates… the basis is still negative and very low at a historical level. [This] explains why gold has ignored higher rates and continues to explore benefits. “
The gold market sees this and looks past two oversized interest rate hikes of 50 basis points, which the markets price at the FOMC meetings in May and June.
“Six months ago, if the market had known that gold was staring down at 50bp increases, no one would 1) expect gold to be above $ 1900 / oz and 2) that gold held, traded offensively and disproved any $ 50. + Drawdowns , “Shiels added. “The question should be, is 50bp enough? Gold claims it is not. When gold prices start to react – lower – to the threat of 75/100 / 200bp Fed increases, it is a sign that the market believes that interest rate policy has a handle on inflation. “
According to Shiels, a chance for an even more aggressive tightening is the reason why the gold’s “big test has not yet come,” according to Shiels. Right now, the gold price is being driven by geopolitics and inflation. But the metal’s resilience to expected market volatility is what will matter most in this year’s price action.
Shiels explained: “Rate for real fed funds indicates that the market has not even started to tighten significantly. It explains why US equities stop, but once a significant tightening / QT begins, gold … will be tested. The idea about that ‘QE’ [quantitative easing] the winners’ post-2008 and more recently post-2020 (which were crypto / stocks / tech / meme stocks, etc., NOT gold) will be the bigger “QT losers” are compelling. This is the big ‘test’ for gold – does it obey ‘symmetry’ and not relax as much as the QE winners (like stocks / crypto / tech) on QT, as it really did not surpass these assets on the way up? “
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