Gold could be helped in gaining price as there us expectations that inflation in the U.S. would rise due to President-elect Donald Trump’s plan to spend on big projects, said a fund manager on Tuesday.
The prices of metals have already been boosted last week after Trump proposed a “$1 trillion over a 10-year period” infrastructure plan in his victory speech. It is expected that the demand for metals like iron, steel and copper would go up if the Trump administration embarks on heavy spending in infrastructure projects.
Alex Merk, president and CIO of Merk Investments said that while the general consensus is that fiscal spending is far easier to achieve than other reforms he has proposed, the market was still speculating on what would lies ahead when he takes office. And that assumption is enough for gold to be underpinned a a potential hedge for inflation.
“Ultimately, what is going to matter is if inflation is going to tick up more than rates are going to pick up–meaning is the Fed going to be behind the curve or not? If the Fed is behind the curve, then gold should do just fine; if however the Fed is able to get in front of this or if inflation is not going to materialize much but the yield curve remains steep and real rates rise, then yes, the gold selling is over,” he added.
Last week, as the dollar slowly strengthened itself, the nearly 5 percent spike that was seen in the prices of gold have been lost and the precious metal sinked to a six-month low on Monday even as it had gained much after the presidential elections by its potential as a risk aversion commodity.
Merk said that gold would likely stay afloat helped by the uncertain environment.
He said that a positive for the precious metal is that gold now has a very high correlation to bond yields even as gold has a historically low correlation to bond yields,
The benchmark 10-year Treasury has gone from a yield of 1.80 to 2.2 percent since last week’s election. The psychological 3 percent level was crossed on Monday by the 30-year bond yield. Bond yields move inversely to bond prices.
There will be a short-covering rally in gold which is expected in the short-term but Merk expected that the correlation between the two to fizzle out. He added that a continuation of the trend would depend on moves in the inflation rate, real interest rates and yield curves in the medium term.
The anticipation is that hike rates with more fiscal spending spurring inflation and that the Fed would get tougher even as real rates haven’t moved up.
But “at end of day, the Fed is going to be behind the curve and gold will be just fine,” Merk said.
(Adapted from CNBC)