Inflation Worries Adding Further Fuel To Gold's Rally To Record Highs

(Kitco News) - Inflation worries remain a theme among gold traders, and this has been reinforced by some of the data this week in the U.S. and elsewhere, analysts said.

“I think inflation is a concern,” said Frank Lesh, broker and futures analyst with FuturePath Trading. “I think it’s one of the reasons we have been buying gold.”

Gold hit record Fresh highs and silver hit a 31-year peak Friday. As of roughly noon EDT, June gold had been as high as $1,480.50 an ounce on the Comex division of the New York Mercantile Exchange, while May silver had been as muscular as $42.825.

Analysts have cited a number of factors beyond ongoing strength, such as continuing European sovereign-debt issues, a weak U.S. dollar, unrest in the Middle East-North Africa region and concerns about U.S. budget deficits and a looming showdown between Republicans and Democrats over further spending.
Add inflation to that mix. A sharp increase in producer prices has many worried that the Federal Reserve’s current accommodative monetary policies will spark even greater increases in both consumer and producer prices later in the year, said Mike Zarembski, senior commodities analyst with optionsXpress.


“Gold has historically been seen as a store of value, and concerns about rising inflation -- especially with the U.S. dollar being as weak as it has been -- can only help to give added support to the gold market,” he said.
During the latter part of the week, the U.S. reported that the overall Producer Price Index rose 0.7% in March and the Consumer Price Index climbed 0.5%. Consumer prices have climbed 2.7% in the last 12 months, the largest such annualized increase since December 2009. Back in November, this rate had been around 1.1%.

The March core rates, which exclude the volatile food and energy categories, were a more muted 0.3% for the PPI report and 0.1% for the CPI. Nevertheless, energy and food costs are among the market’s main concerns, said Charles Nedoss, senior market strategist with Olympus Futures.
Meanwhile, China early Friday reported a 5.4% increase in its year-on-year Consumer Price Index for March, up from 4.9% the last two months.

“You’re marching to new highs here,” said Nedoss of the advances in gold and silver. “I think it is inflation. You’re seeing it show up mostly in the energy sector more than anywhere else right now. Grain prices have pulled back some, but you’re still at historically high prices going into planting.”

Furthermore, Nedoss said, a 0.8% rise in March U.S. industrial production suggests more demand for natural resources in the manufacturing process. “And those aren’t getting any cheaper,” he said.

Goldman Sachs said Friday that it looks for further gold gains in 2011 due to low real U.S. interest rates rather a continuing rise in consumer inflation itself. Goldman, which also said this week it looks for corrections lower in some commodities such as crude oil, envisions “relatively subdued” U.S. inflation for the year as a whole. Still, Goldman said, “Clearly, a higher level of inflation would present upside risk to our gold price forecasts.”
By Allen Sykora of Kitco News; asykora@kitco.com