Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Dovish Fed And Higher Inflation Equals Stronger Gold

By Sunshine Profits (Arkadiusz Sieron)CommoditiesApr 13, 2021 11:38AM ET
www.investing.com/analysis/dovish-fed-and-higher-inflation-equals-stronger-gold-200572806
Dovish Fed And Higher Inflation Equals Stronger Gold
By Sunshine Profits (Arkadiusz Sieron)   |  Apr 13, 2021 11:38AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The latest FOMC minutes were dovish, especially in light of the recent increase in inflation. That’s good for gold.

Last week, The Federal Open Market Committee (FOMC) published minutes from its last meeting in March. They show that – in light of positive economic indicators – the members of the committee turned out to be more optimistic about the U.S. economy since the previous meeting. But this is what we already know from the March economic projections.

What is new and much more important is that Fed officials expressed the view that despite all the progress, the economic situation remained unsatisfactory with many indicators still far from the pre-pandemic level and the Fed’s long-term targets:

Despite these positive indicators and an improved public health situation, participants agreed that the economy remained far from the committee's longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook.

In consequence – and this is probably the key message from the recent minutes – the FOMC members reaffirmed that they are in no rush to taper the quantitative easing. Furthermore, the U.S. central bank will announce a change in the pace of asset purchases well in advance:

Participants noted that it would likely be some time until substantial further progress toward the committee's maximum-employment and price-stability goals would be realized and that, consistent with the committee's outcome-based guidance, asset purchases would continue at least at the current pace until then. A number of participants highlighted the importance of the committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases. The timing of such communications would depend on the evolution of the economy and the pace of progress toward the committee's goals.

And the hike in the federal funds rate will happen only after the start of the normalization of the Fed’s balance sheet. So, given a lack of any communication in this regard, investors shouldn’t expect any increases in the interest rates for years.

Last but not least, the Fed not only started to expect higher inflation – as a reminder, the FOMC participants expect 2.4% PCE inflation in 2021 – but it also “viewed the risks of upside inflationary pressures as having increased since the previous forecast.” However, the central bankers still believe that the increase in inflation this year will be transitory due to the base effects and supply disruptions:

In the near term, the 12-month change in PCE prices was expected to move above 2% as the low inflation readings from the spring of last year drop out of the calculation. Most participants also pointed to supply constraints that could contribute to price increases for some goods in coming months as the economy continued to reopen. After the transitory effects of these factors fade, however, participants generally anticipated that annual inflation readings would edge down next year.

This is a puzzling view in light of the fact that many participants “judged that the release of pent-up demand could boost consumption growth further as social distancing waned.” So, in some magical way, the release of pent-up demand could boost consumption, but not prices, and inflation could be increased only by supply factor, but not by demand factors.

Implications For Gold

What do the recent FOMC minutes imply for the yellow metal? Well, the increase in expected and actual inflation rates combined with the Fed’s dovish stance could create downward pressure on the real interest rates and the U.S. dollar, thus supporting gold prices. The yellow metal could also benefit from the elevated demand for inflation hedges in an environment of stronger upward pressure on prices.

Indeed, the price of gold jumped shortly on Thursday (April 8) above $1,750, as the chart below shows. This upward move was temporary, though, but that can change soon, as the inflation genie has popped out of the bottle.

Gold Prices In 2021.
Gold Prices In 2021.

The Producer Price Index increased by 1% in March, twice more than in February, and significantly above the expectations of a rise of 0.4%. As well, the final demand index moved up 4.2% for the 12 months ended in March, the largest increase since September 2011. Meanwhile, the index for all commodities surged even more (12%!), in the fastest pace since the Great Recession, as the chart below shows. Importantly, the Consumer Price Index has also been rising recently (I will cover this report in the next edition of the Fundamental Gold Report).

PPI Annual Inflation Rate.
PPI Annual Inflation Rate.

Of course, the rise in inflation may also increase the nominal bond yields, which could be negative for the gold market. However, the rally in the bond yields was mainly caused by the fact that investors priced in a more aggressive path of the federal funds rate than the FOMC members have indicated. But after the recent minutes it seems that these traders are starting to capitulate and will not fight the Fed anymore. This would be good news for the gold market.

Indeed, the second quarter started much better for the yellow metal than the awful beginning of the year, and there are some reasons (dovish Fed, higher inflation, limited potential for further rally in the bond yields) for cautious optimism. But the key problem is that the Fed is still relatively hawkish compared to the Bank of Japan or the European Central Bank. Well, we will see, stay tuned.

Dovish Fed And Higher Inflation Equals Stronger Gold
 

Related Articles

Peter Krauth
Silver Headed To $300 By Peter Krauth - May 06, 2021 9

I know this might sound ridiculous to some, but I think silver could reach $300. No, I haven’t lost my mind. After all, it’s a metal that’s known for massive rallies. You see, when...

Dovish Fed And Higher Inflation Equals Stronger Gold

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Erikas Ivan
Erikas Ivan Apr 14, 2021 3:59AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thank you, Treasurys have taken quite a beating in anticipation of rising inflation this year so far.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email