Long-term gold price remains supported by commodity-led inflation - Saxo Bank’s Hansen
After seeing its biggest monthly gain since the start of the year, the gold market is starting September on the back foot as prices test support near $4,350 an ounce.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that gold is struggling as investors continue to focus on short-term inflation fears, which are being driven in part by rising commodity prices. Spot gold last traded at $4,356.60 an ounce, down more than 2% on the day.
Overnight, West Texas Intermediate (WTI) crude oil prices pushed back to $90 a barrel as hostilities between the U.S. and Iran ratcheted up. At the same time, Hansen added that the ongoing war in Ukraine and poor weather conditions around the world are driving grain and soft commodity prices higher, led by sugar, wheat and corn.
He added that in August, the Bloomberg Commodity Agriculture Total Return Index surged 12.4%, rising to a 14-year high.
“In simple terms, the commodities creating the inflation problem have continued higher, while the commodities traditionally bought to protect against its consequences have fallen,” he said.
Gold's selloff started on Friday after Federal Reserve Chair Kevin Warsh, in his speech at the Federal Reserve Symposium in Jackson Hole, Wyoming, reiterated his commitment to bringing inflation down to the central bank’s 2% target.
“Gold’ and silver have both fallen by more than 4% since Friday as Warsh's speech produced three immediate headwinds: higher short-term rate expectations, rising real and nominal yields, and a stronger US dollar,” he said.
In comments to Kitco News on Friday, Hansen warned investors that the new focus on inflation could put some pressure on gold. However, he added that he didn’t see the renewed focus on inflation derailing the long-term uptrend driven by growing government debt and currency debasement fears.
“Higher real rates driven by a credible inflation-fighting central bank are normally negative for gold. Higher long-term yields increasingly driven by concerns about debt sustainability, heavy sovereign issuance and fiscal credibility are a different matter,” he said. “Persistently rising debt-servicing costs may eventually increase pressure on policymakers to prevent long-term borrowing costs from rising indefinitely. Gold therefore remains caught between two opposing forces: the immediate cost of money and longer-term concerns about the quantity and credibility of money. Continued central-bank demand and reserve diversification provide another structural source of support that is less sensitive to short-term changes in US rates.”
Hansen added that supply-driven inflationary pressures also present their own unique challenges for the Federal Reserve.
“Central banks can suppress demand, but they cannot produce additional crude oil, refining capacity or natural gas,” he said. “The paradox is that if rising commodity prices force interest rates higher for longer, the resulting pressure on heavily indebted governments could eventually revive the fiscal and debasement concerns that have been among the strongest structural drivers of investment demand for precious metals.”
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