During the first few months of the COVID-19 pandemic, both CPI and PCE inflation rates were slightly negative. Even after accounting for the fact that some goods became unavailable, the response of inflation has been total silence.
But CPI data released this week in most of the developed markets showed that in June, inflation has finally risen as world economies began to partially reopen.
The US CPI inflation rate rose 0.6% in June, following a 0.1 percent drop in May. It was the first increase in four months and the biggest jump since 2012. The UK CPI inflation rate also rose 0.6% in June. And the French CPI rose 0.1%. Inflation remains very low, and although high inflation in the near future is not likely, I believe the period of disinflation has ended.
Gold Market Implications
Well, higher inflation may increase the demand for gold as an inflation hedge. But wouldn’t this prompt central banks to adopt a more hawkish stance? If inflation were to pick up, quantitative easing measures may be decreased along with potential rate hikes, which will likely translate into higher bond yields globally, which would be negative for gold prices.
But inflation remains very low, and given the slowdown in the pace of economic recovery and consumer spending, Central Bankers in developed markets are not likely to change their ultra dovish stance for months, if not years, so real interest rates will stay at their very low levels supporting gold prices. Moreover, even when the pandemic is totally contained, economies are likely to face important headwinds, which will limit risk-appetite among investors.
Buy The Dip
Technically speaking, gold has been consolidating around $1,800 an ounce for a few days now, which means not even normal profit-taking is taking place. I think that price declines should now be viewed as buying opportunities because the safe haven will go further north soon.