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#1 02-02-2021 10:19:25

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3050

Gold/USD: what's next for gold?

Gold/USD: what's next for gold?

Gold is now hovering around $1,853, in what appears to be a consolidation below the psychological level of $2,000. After reaching an all-time high above $2,000 last year, gold has declined from these highs, despite the continued appreciation of other markets against the dollar. In a sense, it can be said that the price of gold is ahead of the curve and the coming months are critical to see if this correlation exists.

One of the reasons investors are turning to gold is to protect themselves against inflation. If inflation has not yet shown its teeth, it will do so in the future. The question is not whether inflation will rise, but by how much and whether the Fed is able to contain it once it exceeds its target.

Gold and inflation

The price of gold is the best reference for measuring inflation. The Consumer Price Index (CPI) or Personal Consumption Expenditures (PCE) in the United States are the official indices for studying inflation. However, the composition of the indices is such that they do not cover all relevant goods and services in an economy. Some say this is intentional, but that's another story. As such, the price of gold serves as a reference for real inflation, i.e. the daily increase in prices.

The United States Federal Reserve (Fed) recently changed its mandate. It now targets an average inflation rate of about 2%, but no one knows the period the Fed will use to average the data. For example, are we talking three, six months or 1 year? That's important because if inflation is above 3% in a month, the longer the period the Fed uses, the lower the average inflation will be. In other words, the Fed won't do anything to bring inflation down.

In the face of such uncertainty, the other way to protect against future inflation is to own gold. This may be the reason why the price of gold is approaching the $2,000 level. Like it or not, the fiscal and monetary policy responses during the virus crisis will result in higher inflation. It remains to be seen by how much higher it will be, but that is exactly why portfolio managers are adding gold to their accounts.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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