Precious Metals Weekly – Inflation expectations

door: Georgette Boele

140612 - Precious-Metals-weekly - Inflation expectations.pdf (183 KB)
  • Gold’s intriguing market reaction
  • Talks to resolve the strikes at South African mining companies unsuccessful

Gold’s intriguing market reaction

The recent behaviour of gold prices has been rather intriguing. In what way? Since the ECB has surprised financial markets with a more substantial package of monetary easing, gold’s character has seen remarkable shifts. It has behaved as a risk-seeking asset compared to being a safe haven asset in the past. For example, the correlation between gold prices and equity volatility (VIX) has turned negative (see graph below). It also moved in tandem higher with US Treasury yields and US stock indices, relationships that are usually very negative. In the past we have seen similar behaviour of gold prices at times that the Fed embarked on several rounds of quantitative easing. As a result, gold was seen as an attractive asset, because of low official interest rates and negative real yields. In sum, ECB monetary policy easing has supported gold, because expectations that monetary policy in the US, Europe and Japan will remain very accommodative.



But there is more…

Gold prices have not only received support because of the change in the market’s view about monetary policy in general. The ECB monetary policy decision has also triggered a change in market perception about inflation, mainly in the US. Recently US inflation data have pointed into the direction that inflationary pressures may be building. This has not gone unnoticed by financial markets. The decision by the ECB has resulted in a realisation that central banks may be reluctant to take away the punchbowl. Therefore, the market seems to have increased inflation expectations in the US. This could be a reflection of the market’s perception that the Fed may be behind the curve in the future. Therefore, gold prices have bounced higher. In general, higher inflation expectations are good news for gold as an inflation hedge asset. We expect these developments to be temporary, but the Fed’s behaviour is quite crucial in this.



Talks to end the strike are unsuccessful

The sentiment in platinum and palladium has improved over the recent days. For starters, the abrupt end of the pressure on gold prices has helped platinum prices. What is even more important is that a near-term solution to end the strikes at South African mining companies looks to be further away after talks ended without a resolution. This has supported both platinum and palladium prices this week. Despite recent developments, we continue to expect price weakness this year, because we expect a resolution eventually and higher US Treasury yields and a stronger US dollar.