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US Inflation Softens, Gold Still Has Drivers to the Upside

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Dec. 4 2020, Updated 10:50 a.m. ET

Inflation softens

As per the U.S. Bureau of Labor Statistics, the US Consumer Price Index (or CPI) rose 0.2% in February, compared to a 0.5% rise in January 2018. This inflation figure was in line the market expectation of a 0.2% rise. The year-over-year (or YoY) rise in inflation came in at 1.8% for February 2018, also in line with expectations. The softer inflation figure in February is also in line with the weaker-than-expected growth in wages during the month.

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Worries thwarted—for now

The markets were worried that higher inflation could lead the Fed toward a more aggressive pace for rate hikes in 2018. This change would have been detrimental for equities as well as gold. The case of limited price pressure amid full employment is conducive to US economic health, increasing risk assets’ attractiveness.

Inflation expectations and gold

In the short term, softer inflation led risk assets to rally, but the momentum might stall going forward, given the trade war fears. The $60 billion tariffs on Chinese imports target the technology (XLK), consumer electronics, and telecommunications (IXP) sectors and could have a negative impact on the equity markets.

Expectations of rising inflation (TIP), on the other hand, are conducive to gold’s inflation-hedge appeal.

The mining stocks that have followed gold in their price movements include Alacer Gold (ASR), IAMGOLD (IAG), Buenaventura (BVN), and Gold Fields (GFI). These stocks are currently trading at $1.8, $5.2, $14.7, and $4.0, respectively. Like precious metals, precious metal miners may rise due to a probable rise in inflation.

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