Gold Climbs Past $1,900 on Weaker Dollar and Lingering Inflation Fears

trend analysis

Gold prices continued their upward momentum on Wednesday. A soft U.S. dollar and growing concerns over higher inflation rates pushed the yellow metal above $1,900 an ounce.

The dollar index remained near a 4-1/2-month trough. It lifted the demand for the bullion by making it less expensive for investors using rival currencies. The declining U.S. Treasury yields further supported gold. Benchmark yields plunged to 1.56%, which is the lowest in two weeks. It lowered the opportunity cost of owning the non-interest-bearing metal.

Spot gold is currently trading at $1,905.31 per ounce as of 0904 GMT.

Stephen Innes of SPI Asset Management noted that growing inflation risks and weaker dollar boosted gold’s status as an inflation hedge. He suggested that the most important thing for the bullion right now is front-end real rates. If the Federal Reserve keeps the front-end rates low, it will weaken the greenback, he explained. Innes added that the central bank is likely to remain dovish even if the inflation is high.

Federal Reserve Vice Chair Richard Clarida said yesterday that the central bank could address any inflation outbreak with more modest rate hikes. It was a reassuring comment. But it reflects a shift of tone from Fed Chair Jerome Powell’s statement a month ago that it was not yet time to consider policy tapering. San Francisco Federal Reserve Bank President Mary Daly confirmed that they are “talking about talking about tapering.” She is referring to a potential reduction in the Fed’s $120 billion monthly bond purchases.

The European Central Bank (ECB) will review its emergency bond purchases in light of economic recovery and declining COVID-19 cases. But ECB policymaker Yannis Stournaras warned the central bank that the recovery remained fragile and there is no evidence of high inflation in the foreseeable future. He expressed support for the ECB’s €1.85 trillion Pandemic Emergency Purchase Program.

Meanwhile, Senate Republicans are planning a counteroffer to the administration’s $1.7 Trillion Infrastructure Investment Plan. Senator Shelley Moore Capito said they are seeking an 11th-hour bid to reach a bipartisan deal for the revitalization of America’s infrastructure. However, Sen. John Barrasso admitted that their plan is very far from that of the Democrats. The Republicans want to divert unused COVID-19 relief funds to infrastructure projects.