Gold to Rise as Inflation Heats Up Further

Gold is set to get a boost as inflation is picking up steam due to a tight labor market and high oil prices.  The most recent data shows that headline inflation climbed 0.2% month-on-month in May according to the Labor Department.  That puts it at 2.3% year-on-year.

On top of that, core inflation, which strips out volatile commodities like food and energy, rose to 2.0% year-on-year.  This was the highest reading since March 2012 and is now at the threshold that the Federal Reserve set.

Moreover, a number of important lead indicators point to s further rise ahead.

First off, rising wages will force businesses to raise prices and increase wages.  We are seeing early signs of this as personal income rose a healthy 0.4% month-on-month in May.

On top of that, unemployment in the United States has fallen to a paltry 3.9%.  That’s less than half where it was about a decade ago and is now near a 17-year low.  This is putting further upward pressure under wages and prices.

Finally, oil prices have run up strongly recently – topping $74 a barrel at Friday’s close.  That’s a healthy 22.7% rise since the start of the year.

Rising oil prices matter to the economy and inflation because oil is the quintessential industrial commodity.  It’s used to produce plastics, pave roads, fuel to transport good and countless other applications.

Accordingly, it contributes to rising costs (and prices) because of its widespread use in the economy.  The combination of rising oil prices and wages will continue to push inflation higher in the coming months.

Gold is One of the Best Hedges Against Rising Inflation and Will Shine Again

Gold has been used throughout history to protect against inflation and at times even the destruction of fiat (paper) currencies. The reason for this is that while the supply of fiat currencies tend to increase drastically over time, the total supply of gold only increases marginally.

That means an ever-growing amount of paper money is chasing a relatively limited supply of gold.  The basic laws of economics dictates that whenever demand overwhelms supply, prices rise.

This is particularly the case during periods of high inflation because the supply of money surges.  Indeed, the last time we saw inflation rising rapidly like this was back in 2011.  Inflation more than doubled from 1% to 2.2% by year-end.

This sudden rise sent investors piling into gold.  The yellow metal climbed an astounding 32.6% and peaked at $1,884 an ounce in 2011.

I don’t think gold will rise as forcefully this time.  But it is due to make a powerful rebound as inflation ticks inexolerably higher.

See more of our analysis here.

 

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Al Basoglu

I am a financial services professional with over a decade of experience in various roles. I've lived and worked abroad in 5 different countries while pursuing personal and professional challenges. My interests include markets, history and different cultures. I tend to weave all of my interest into my analysis and articles.