Gold bullion and related exchange traded funds have been touted as a tool to hedge against inflationary pressures. However, gold ETFs may not benefit as much if inflation spikes this time around.
Analysts argue that the prospect of a slightly higher-than-expected inflation reading after Wednesday’s higher April PPI number could actually hurt gold’s outlook, report Patti Domm for CNBC.
“The PPI is a mixed bag for gold,” Jim Wyckoff, senior analyst at Kitco, said in the article. “On the one hand, inflation is a positive for gold because it suggests money could flow out of paper assets into hard assets, so that’s bullish but the bearish part of the PPI is it could induce the Fed to continue its tapering on an even more aggressive pace.”
On Wednesday, the government revealed that the Producer Price Indcx inched up 0.6% in April, above the 0.2% expectations. Traders are waiting to see if the higher PPI reading will translate to a higher Consumer Price Index reading on Thursday, which is expected to increase 0.3%.
Gold has acted as a traditional hedge against rising inflation by helping investors maintain or even increase wealth. However, investors may have to cheer for low inflation in the current environment.
“I think in the near-term, it’s probably going to…break back below $1,300,” Howard Wen, precious metals analyst at HSBC, said in the article. “We have CPI tomorrow…Normally if CPI data is high that would be a positive for gold but that could be a negative because of the Fed’s linking of inflation and unemployment to monetary policy. The Fed is concerned about a lack of inflation. Ironically, if it’s below expectations, that would be a positive for gold.”
COMEX gold futures traded around $1,305 per ounce Wednesday. Meanwhile, the SPDR Gold Shares (NYSEArca: GLD) was up 1.0% and closed back above its 200-day moving average. GLD is up 7.3% year-to-date. [Ongoing Ukraine Crisis a Boon for Gold ETFs]
For more information on bullion, visit our gold category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of GLD.