Gold Continues To Rebound, Despite Hawkish Powell’s Letter

The declines in the bond and forex markets enabled gold to catch its breath. Of further importance is that they started falling when it became clear that the Fed would be more dovish and tolerant of higher inflation than was originally believed by the markets.

Second, there has been a surge in global coronavirus cases which renewed demand for safe-haven assets, such as gold. Also, in the US, the number of confirmed cases and hospitalizations is increasing in some areas of the country, despite the vaccination progress. That is the effect of the new variants of the virus and the pandemic fatigue, i.e., many people tired of it have dropped their infection control measures.

Third, inflation is accelerating, which is becoming increasingly visible. For example, the latest IHS Markit U.S. Manufacturing PMI shows that costs and charges have historically elevated in March.

Supplier lead times lengthened to the greatest extent on record. At the same time, inflationary pressures intensified, with cost burdens rising at the quickest rate for a decade. Firms partially passed on higher input costs to clients through the sharpest increase in charges in the survey’s history.

Commenting on the numbers, Chris Williamson, Chief Business Economist at IHS Markit, said:

Raw material prices are increasing at the sharpest rate for a decade and factory gate selling prices have risen to a degree not seen since at least 2007. The fastest rates of increase for both new orders and prices was [sic] reported among producers of consumer goods, as the arrival of stimulus cheques in the post added fuel to a marked upswing in demand.

What matters here is that the inflationary pressure is likely to remain with us for a while, despite the pundits’ claims that it’s triggered merely by temporary factors. In the 1970s, they were talking the same – until stagflation emerged and gold shined.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does ...

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