Do Mounting Inflation Expectations Mean an Upside for Gold?



Inflationary policies

While President-elect Donald Trump’s win has led to pressures on gold prices, his inflationary policies could boost gold demand. US inflation expectations have already risen on the back of Trump’s election. His fiscal policies are likely to be expansionary.

Inflation expectations have been inching upward lately. Trump’s expansionary fiscal policies and infrastructure spending plans have increased inflation expectations. Moreover, market participants are worried about the wage pressures that could start building, as the United States is already operating at near-full employment. A fiscal stimulus could lead to higher wages, which would, in turn, lead to broader price rises.

The Federal Reserve’s ideal inflation rate is 2% in order to ensure stability and employment. Core inflation—or inflation minus food and energy—remained at ~2% in 2016. Total inflation has remained below 2% since July 2014.

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Inflation concerns and gold

Note, however, that gold needs a long-term horizon to match inflation’s pace. In the short term, other variables will be present, including the real interest rate and people’s confidence in the economy. These variables could cause inflation to run ahead of gold prices, or vice versa.

The large, deficit-funded fiscal stimulus is likely to push inflation well above the Federal Reserve’s 2% target, meaning that even if the Fed raises rates more aggressively, real interest rates should remain low.

Mining stocks and funds could follow gold and other precious metals if they do see a rise. In the meantime, gold’s price strength will manifest itself in the share prices of gold miners as well. These miners (RING) include IAMGOLD (IAG), Coeur Mining (CDE), Harmony Gold (HMY), Kinross Gold (KGC), and Yamana Gold (AUY).


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