Higher inflation and rising interest rates which in the US usually does wonders for the US dollar as investors from around the globe chase higher returns but as it turns out this time, it is not the case and safe haven assets like gold are luring cautious investors
CPI numbers out a few days ago from the US showed inflation figures within the US Federal Reserve’s target range of between 2 and 3 percent and with the jobs market also booming, the Fed has a green light to lift interest rates further, maybe by as many as 4 times this year.
So what is going on in the markets at the moment and why is such a scenario at play?
Ever since the CPI numbers were released on Wednesday (and above expectations I may add) the US dollar has lost ground while gold has jumped over $50 and if we look back at previous rate tightening cycles gold has actually suffered.
Below may be the answer to the earlier question,
The US economy has not had to deal with rising inflation in nearly a decade so the reason for the strange events unfolding may be buried in the fact that investors are spooked by prospects of higher inflation, which is completely justified as was shown by the tumble in financial markets over the last 2 weeks which was caused purely by the fear of higher interest rates.
So this time around, it looks as if gold is going to be the safe haven of choice for investors and funds alike as a hedge against inflation which will erode their purchasing power.
Maxwell Gold of ETF Securities believes that the US dollar had already fallen out of favour before this week’s CPI figures and that an overall US dollar will also help gold
"Beyond the inflation factor, we're seeing the dollar remain weaker," he said, "I think that we are structurally in a dollar bear market and I think that it could boost gold prices in this range." He said