Is Stubborn Inflation A Problem For Gold Markets?

On November 13, 2024, U.S. released inflation data for October. Inflation Rate increased from 2.4% in September to 2.6% in October, while Core Inflation Rate remained unchanged at 3.3%.

Inflation Rate increased at a time when the Fed has started to cut rates in order to provide support to the economy. Core Inflation Rate has not moved below the 3.0% level despite Fed’s efforts.

The stubborn inflation may serve as a negative catalyst for gold markets in case traders start to worry that inflation may rise again.

The recent increase in Inflation Rate is not a big problem, but the stubbornly high Core Inflation Rate is worrisome.

If inflation starts to move higher again, the Fed may be forced to start raising rates again. In fact, bond markets are worried that Fed is cutting rates too aggressively.

The yield of 10-year Treasuries moved from the lows near 3.60% in September to 4.40%. This move shows that the bond market is worried that inflation may get out of control in the longer term.

What if Fed stops cutting rates? In this scenario, speculative buyers will likely move away from gold markets, which will put short-term pressure on the price of gold.

However, central bank purchases would not stop as central banks must diversify their reserves. In fact, central banks may increase their purchases in case gold prices fall to more attractive levels.

At this point, the price of gold has pulled back by roughly 8% from historic highs. While this correction is certainly unpleasant for short-term speculators, it is not sufficient to attract additional central bank purchases.

Most likely, central banks would wait for a more significant correction before they would be ready to change their plans and increase the pace of gold purchases. In the long-term, central bank buying will provide sufficient support to gold markets as there is no alternative for reserve diversification.

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