The Daily Market Report: Gold Consolidates Amid Uncertainty Over Inflation Risks

USAGOLD/Peter Grant/06-30-17

Gold is consolidating within the recent range, ahead of the pre-holiday weekend. Markets are open on Monday for a partial session and then closed on Tuesday, July 4 in observance of Independence Day.

There seems to be some conflict in the gold market as the mindset shifts from inflation expectations back to disinflation. Investors that bought gold in anticipation of the Trump reflation trade are having to rethink that decision with the President’s economic agenda bogged down and the data showing that price pressures are indeed ebbing.

Data out this morning reflects weakness in both consumer spending and inflation. PCE rose just 0.1% in May, while the chain price index fell 0.1%.

While some inflation based trades may be getting unwound, it’s worth remembering how well gold performed during bouts of disinflation, stagflation and deflation. Hint: Gold performed exceptionally well!

It is the central banks that are fomenting the confusion. The supposedly data driven Fed continues on its tightening path, disregarding the realities of the inflation and growth data. Both the ECB and BoE jumped on the bandwagon this week, striking markedly more hawkish tones and driving global bond yields higher, even though growth remains tepid and there is nary a whiff of inflation.

There are undoubtedly some that believe the central bank narrative that inflation is in the offing and policy must be tightened to prevent an overshoot. However, the predicative abilities of these institutions have been called into question over the years.

If inflation risks are indeed dead, gold should be just fine as negative price risks signal heightened growth and systemic risks. At that point safe-haven buyers will step in to support the yellow metal. It may also prompt the central banks to reverse course, further eroding their credibility in the process.

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