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Heraeus Precious Appraisal

  • Edition 20 - 14. June 2021

Gold and silver poised for gains on inflation fears – transitory or not

Rising inflation is highlighting gold’s appeal. The huge amount of fiscal and monetary stimulus that was pumped into advanced economies led to a much faster economic recovery than was anticipated by the end of 2020, and financial market expectations of inflation are rising sharply. In May, the US consumer price index (CPI) increased by 5% (vs. the 4.7% expected) over the past 12 months, the largest annual growth since August 2008 (source: US Bureau of Labor Statistics) and reinforcing concerns that inflationary pressure is building.

Real interest rates are becoming more negative as inflation rises while central banks keep rates on hold, which is positive for gold. In the US, the Federal Reserve has prioritised bringing unemployment down to pre-pandemic levels while Keeping interest rates extremely low. The Fed and ECB are expecting the rise in inflation to be transitory. If this is not the case, then central banks risk reacting too slowly, which will benefit gold.

Falling real yields should push gold and silver higher. The bond market also remains sceptical that rising inflation is anything more than transitory, as the Fed has claimed, since bond yields have actually slipped lower over the last few weeks. However, this is good for gold as it means that the real yield is becoming more negative. The silver price has not proved to be as strong as gold which is unusual because it normally outperforms gold in a rising market when inflation is a concern, though it may play catch-up later on.

Gold ETFs are staging a comeback. The World Gold Council reported that gold-backed ETFs recorded inflows of $3.4 billion last month (+61.3 tonnes) fuelled by ongoing inflation concerns, reversing three consecutive months of net outflows. Large North American and European (UK, German) funds were the primary drivers of inflows during May. Global gold ETF holdings now stand at 101 moz, down from the record levels recorded towards the end of 2020, but rising steadily.

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