Gold to fly on inflation

(April 11, 2017 - by Ross Norman)

The head of one of London’s oldest bullion dealers has predicted the gold price will move higher as inflation hits developed markets. Sharps Pixley chief executive Ross Norman says inflation will outweigh rate hikes and push gold higher.

Speaking on the sidelines the Dubai Precious Metals Conference over the weekend, Sharps Pixley chief executive Ross Norman said: “Prospects for inflation are rising all the time. Gold doesn’t work lock-step with the inflation rate when it goes from 0.5% to 1% but, when it gets to 3%, you get a step change.

"We are not there yet, but we are getting close to it, and that’s when you see the multiplier effect.” But the timing was difficult to predict, he said.

Philip Newman, a director at Metals Focus, said the fragile US recovery and high debt levels would likely curb the Federal Reserve’s ability to significantly raise rates to stifle inflation for fear of triggering a recession.

But he added the inflation factor could be both good and bad for gold.

“People like to buy gold as an inflation hedge. But if rates do go up, it is more expensive to borrow money to invest in gold, and real (inflation-adjusted) interest rates are bad for gold because yields go up.”  Gold is a non interest-bearing asset.

Norman was broadly positive, however. He was sticking to his forecast average price of US$1,310 per ounce for 2017, a figure quoted in a London Bullion Market Association (LBMA) survey at the start of the year.

The LBMA report said, taken together, the contributors reckoned on a price of $1,244/oz in 2017, broadly in line with the actual average price in 2016. The current price of about $1,250/oz is 8% up on early January, following the inauguration of Donald Trump as US president.

Most observers cited geopolitical uncertainty as a key support for gold – with the latest US airstrike on a Syrian government airfield adding to gold’s lustre.

Jeff Rhodes, chief executive of Dubai-based Zee Gold said: “I have seen nothing so far from the Trump presidency that says we are going to have any kind of stability any time soon.”

But Newman warned key supply-demand fundamentals were not overly supportive. “You have still got mine production at record highs in 2017; jewellery, coin and bar sales are still relatively weak, especially in China where rising living costs are squeezing disposable income.”

In India, there was uncertainty due to a changing tax regime. But Dubai-based bullion trader Harish Pawani said the first quarter in India had been stronger than the same period a year ago. “Markedly better,” he added.

Analysts said even with two more expected interest rate rises in the US this year, real returns would be in negative territory because inflation was edging up. Rates were also negative in other key currencies such as the Japanese yen, the euro and the Swiss franc.

“Investors want yield, and they are not getting it and that is a benefit to gold,” Newman said.

The same arguments held for silver with the added bonus it would benefit from rising global industrial output.

There was less enthusiasm for platinum as South African production cuts hadn’t materialised as forecast.

Palladium used in catalytic converters on gasoline-powered cars was said to be a better bet. That said, some say the current auto sales boom has peaked.