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How Will Inflation Expectations Play on Gold in 2018?

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Inflation and the Fed

As discussed in the previous part of this series, the Fed is keenly looking at inflation data to decide on the frequency of rate hikes in 2018. While the Fed kept on stating for some time that the weaker inflation data is transitory, recently it said low inflation is “a mystery” and an “unexplainable surprise.”

The minutes for the Fed’s December 2017 meeting showed that Fed officials are still worried about low inflation. However, the Fed believes the recent tax changes should boost consumer spending, which, in turn, should drive the inflationary pressures.

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Inflation firming up

While inflation has remained low for several months, the most recent readings might suggest that it has started to pick up. The latest consumer price inflation (or CPI) came in at 2.2% while headline personal consumption expenditure (or PCE) inflation came in at 1.8%. The Fed’s preferred measure of inflation, core PCE, came in at 1.5%, which is below its target of 2.0%. The producer price inflation (or PPI) came in over 3%, which is a multiyear high. As PPI remains high, chances are that this inflation will pass onto consumers, resulting in higher consumer price inflation as well.

Inflation and gold

Since gold is often used as an inflation hedge, firming up inflation is a good prospect for gold. On one hand, rising inflation should encourage the Fed to increase rates. On the other hand, it should drive investors toward gold (GLD). In such an event, key gold stocks (GDX)(GDXJ) like Gold Fields (GFI), IamGold (IAG), Kinross Gold (KGC), and New Gold (NGD) should also benefit. While company-specific factors led to annual gains for IAG, GFI, and KGC, NGD saw losses amounting to 6.0% in 2017.

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