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Gold prices are getting a boost from rising inflation, despite the Federal Reserve not raising U.S. interest rates again until December.
Recently, investors have pushed the 10-year U.S. Treasury yield above 3 percent, something which would normally spell more weakness for gold. However, this is not the case.
The higher yields are usually a sign of investors withdrawing their investments from bonds, which would leave more capital to accumulate bullion. However, the gold price is generally rising in the context of higher inflation expectations.
The rise in U.S. rates is the result of the Fed’s efforts to address rising inflation from the large structural changes in the economy which are built around the transition away from a fixed-rate credit model.
Some policymakers expect inflation to breach 3 percent this year and 2019, which is a notable milestone that would create immense pressure on the Fed to tighten interest rates.
The ongoing trade war between the U.S. and China is only exacerbating that. Because of the metal’s traditionally safe-haven status, gold has benefited from the increased economic concerns.
Although the gold price is not expected to rise to anywhere near the inflation peak of the mid-70s (see chart below), it is not too far off.
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Investors should expect gold prices to rise even higher over the next several months as growth in global demand and inflation approaches the peak seen in the late 70s.
Commodities remain the best place to park money if you wish to profit from the growing risk-on trade. Be careful when deciding which commodities to buy, as volatility has been in a low-gear for a while now.
Commodities can be hurt by a slowing global economy and low oil prices, but the new strength in the dollar, along with rising interest rates, is likely to bring the next spike higher for gold prices.
Author’s note: If you are not profitable following initial holdings, please consider converting losses into gains by trading the options.
More analysis and outlook from the CBOE Gold & Silver Index (GOLD)