Inflation Fears To Support Gold Once Stocks Stabilize

Gold may be poised for further gains due to growing inflation fears, especially once equity markets stabilize and with the U.S. Federal Reserve speeding the pace of easing its monetary policy, traders and analysts said.

One observer compared the Fed’s recent rate cuts to a doctor administering medicine in an attempt to save the life of a patient – in this case the economy – before worrying about possible side effects, such as inflation.

As it is, the gold was already drawing some buying even when it was hit earlier in the week by long-liquidation pressure from investors needing to raise cash as stocks sold off.

“Silver and gold have done a good job of holding together as the stock indices fell apart,” said Ira Epstein, chief executive with Ira Epstein & Co. Futures. “They’ll do a phenomenal job to the upside once they believe the economy is on better footing. The rational for that is all these rate cuts will lead to inflation.”

Precious metals are likely to draw safe-haven buying due to some of the uncertainties in the financial and credit markets, said Gijsbert Groenewegen, managing partner with Gold Arrow Capital Management.

“On the other hand, precious metals have also been an inflation hedge,” he continued. “If you look at food and energy prices, there is inflation. Wheat is at all-time highs. Look at corn. You’re having an acceleration of the world population having access to ‘better foods.'” With oil at historically high prices, demand for biofuels has added to rallies in food commodities such as corn and sugar, he added.

Get Your Buy Orders Ready

Today has all the markings of a short term bottom.

DJIA futures down almost 550 points.

Small Gold Correction Possible After Run Up

Spot gold and the futures market could be due for a correction after prices ran up to record highs lately, especially with large speculators accumulating near-record net length, analysts said.
Nevertheless, some suggest any pullbacks could be modest and temporary in a market where so many factors are propelling the buying.

Gold in fact did run into some profit-taking pressure late in the U.S. morning, observers said. After hitting a contract high of $916.60 an ounce, February gold on the Chicago Board of Trade fell as far as $894.70 before stabilizing, at least for now.

The yellow metal has been supported by worries about weakness in the U.S. economy, credit-market problems, expectations for U.S. interest-rate cuts that could lead to further inflation, and global tensions in parts of the world such as the Middle East.

“I think a correction is likely sooner rather than later,” said Jim Steel, precious-metals analyst with HSBC. “Whether it will in fact be the end of the bull-market rally is another issue. But it wouldn’t surprise me that if other commodities continue to weaken, and given the extraordinarily high net speculative open interest, that we see a correction.”

Gold’s bullish performance lately is outpacing the weakness in the U.S. dollar, signaling an increase in gold’s intrinsic value, perhaps reflecting the risk from inflation over the medium term or as a hedge on other asset values, said Michael Jansen, strategist with J.P. Morgan.

“However, positioning to the long side has now become acute and suggests that a consolidation is due,” he said in a research note. “The physical market has ground to a halt and scrap volumes have increased, which historically has signaled that the rally should lose momentum and in turn encourage profit-taking.”

Nevertheless, he still sees gold climbing toward $950 to $975 an ounce this year with more downside potential in the dollar. This, he said, could mean that any pullbacks in spot gold below $850 would be buying opportunities.