Record gold price flashes warning for Fed's rate-cut hopes

By Myra P. Saefong

Gold is 'sniffing' out this rise in commodities and 'flashing warning signs' of inflation: analyst

Gold has climbed to a record high and, as an asset historically seen as a hedge against inflation, its performance could offer a sign of what's to come for inflation and the Federal Reserve's efforts to tame it.

If gold is seen as a hedge in inflation, then its record run would indicate that market participants believe the Fed's "hint of future [interest] rate cuts are at odds with winning the fight to control inflation," said Edmund Moy, senior IRA strategist for precious-metals distributor U.S. Money Reserve, and a former director of the Treasury Department's United States Mint.

Gold futures (GC00) (GCJ24) touched a record intraday high on Thursday at $2,225.30 an ounce on Comex. It marked a record high settlement of $2,188.60 on March 11.

The metal has been climbing in response to growing inflation pressures, said Peter Spina, president of GoldSeek.com.

"We are going back into an inflation wave." he said. "You can see it in front of our eyes real-time building."

Prices for a range of commodities are also climbing, with the S&P GSCI index XX:SPGSCI, a benchmark for investments in the commodity markets, up nearly 8% so far this year, as of Thursday. Oil prices (CL.1) (BRN00) recently climbed to five-month highs, soaring cocoa futures (CC00) are stoking fears of a potential chocolate crisis, silver (SI00), copper (HG00), and livestock futures (LH00) (FC00) (LC00) have gained ground year to date.

Recent strength in commodity prices may indicate some "inflation resilience," which support gold prices in the near term," said Rob Haworth, senior investment strategist at U.S. Bank Asset Management. Investors may also be seeking some "diversification from equity risks given the concentration in large U.S. stocks," with the S&P 500 SPX and Nasdaq-100 NDX near all-time highs.

Read: Here's why gold, bitcoin and stocks are all hitting new highs

While inflation pressures appear "somewhat sticky" with recent strength in gasoline, oil and copper prices, it's unlikely that there will be a significant resurgence in inflation, Haworth said.

Spina, however, thinks gold is "sniffing" out this rise in commodities and "flashing warning signs" of inflation.

"Investors should take notice," he said.

Fed policy

Wednesday's policy announcement from the Fed was the most recent trigger for gold's price climb.

One of "clearest messages from this week's Federal Open Market Committee meeting was that inflation on the Fed's benchmark, core personal consumption expenditure, is still significantly higher than the central bank's stated target of 2%, said George Milling-Stanley, chief gold strategist at State Street Global Advisors.

The most recent figure was 2.8%, and the Fed this week raised its expected rate for the end of this year to 2.6% from 2.4%, he said. That means inflation in the Fed's view is "still sticky and too high."

See: Stock market's post-Fed rally hides some worry about officials' commitment to 2% inflation

The Fed also reduced its forecast number of rate cuts for 2025 to three from four, said Milling-Stanley. That is "exactly the sort of situation in which I would expect gold to perform strongly."

Meanwhile, the broad climb in commodities is contributing to sticky inflation "at a rate that makes the Fed uncomfortable," he said.

The Fed finds itself in a difficult position: "it doesn't want to keep interest rates high for so long that it causes serious damage to the economy and the labor market," said Milling-Stanley. However, "equally, it doesn't want to start easing too soon while inflation remains above its target."

Good's good and bad influences

That "sticky" inflation has helped support prices for gold.

But while being a hedge against inflation is one reason to own the metal, it's not the only thing that influences gold prices, said U.S. Money Reserve's Moy.

One "major under appreciated driver" of gold prices is increased demand from Chinese buyers concerned about the state of the Chinese economy, he said.

GoldSeek.com's Spina said there's "incredible" demand coming out of China, and it's not just Chinese central bank demand for gold.

Read: Gold scores another record finish. Here's who isn't buying.

Young Chinese gold buyers are "flooding into precious metals," he said. China does not have a currency that can compete, at this time, with the U.S. dollar and the only real option in the marketplace is gold - "the money of trust when trust breaks down among international powers."

Gold is 'the money of trust when trust breaks down among international powers.'Peter Spina, GoldSeek.com

Also among gold's influencing factors, there's the uncertainty that comes from geopolitics, Moy said.

Geopolitical tensions around Russia's invasion of Ukraine and the potential for rising strains between the U.S. and China over Taiwan also remain a concern. And as the Israel-Hamas war affects shipping via the Red Sea and Gulf of Oman, and with Iran's deepening involvement, there remains a higher risk to global oil supplies which, if realized, would have a big impact on inflation and recession, he said.

Bad news stories, however, aren't the only factor that push up gold prices, said Moy - good news can contribute to that too.

Falling interest rates, the Fed signaling that rate cuts are still planned for this year, and expectations for a weaker dollar can push up gold prices.

"In an unusual convergence, what is likely happening now is most of the factors, both bad and good news that increase gold prices, are in play today," Moy said.

Is gold really a good indicator?

But maybe gold's rise isn't telling much about the inflation outlook.

In a note, Joseph Kalish, chief global macro strategist at Ned Davis Research, an investment-research firm, wrote that while gold's higher price settlements may indicate an inflation problem to some investors, he doesn't believe that's the case.

He told MarketWatch that a weaker U.S. dollar, buying by emerging market central banks, and increased geopolitical uncertainty are the reasons behind gold's rally.

"Inflation expectations haven't moved much and remain well-anchored," he said. "I don't think [the gold rally] is telling us much about the outlook for inflation."

He said rate cuts should support commodities by weakening the dollar and supporting global demand. If the Fed doesn't cut rates, commodities "shouldn't rally much more, or retreat."

-Myra P. Saefong

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03-22-24 1354ET

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