Gold: 'It's a Bargain at $930 an Ounce'

London Telegraph
From a long-term perspective, gold is a bargain at recent prices in the $900 to $930 an ounce . . . and will remain so even as it begins to move into a higher trading range.

Recent gold-market developments and technical price action – along with broader economic and financial-market developments – suggest gold is bracing for a resumption of its long march upward and a retest of its historic high in the months ahead.

First and foremost, the bullish outlook for gold rests on the increasing likelihood of accelerating U.S. inflation in the years to come – and an associated unprecedented rise in investor demand for the yellow metal.

This nascent inflation has not yet been reflecting in world financial markets. But, judging from anecdotal evidence and the financial press – and the warnings of a growing number of institutional investment managers – we believe a gradual, subtle, but important, upward shift in inflation expectations is already under way.

Inflation doves (and others fearing imminent deflation) point to the currently low, almost negligible, rates of consumer price inflation and the narrow interest-rate spread between ordinary US Treasury securities and US Treasury Inflation-Protected Securities (TIPS) as evidence that inflation and inflation expectations remain subdued. This – along with other important factors that we'll discuss in subsequent posts – has helped keep gold prices down in recent months.

We think those looking at the US Consumer Price Index are focused on the wrong inflation indicator. Instead, a look at the gross domestic product price deflator, a broader, more reliable, and less volatile inflation indicator – rising at an annual rate of 2.9pc in this year's first quarter – should be enough to put fear in the hearts of economic policy-makers . . . but, as far as we can tell, they're looking at the CPI and still worrying more about deflation.

Importantly, in our view, if only a small percentage of investors become worried about inflation, gold could, and likely will, benefit long before any sign of a broad-based rise in inflation expectations appears in the interest-rate differential between ordinary Treasury securities and TIPS, the so-called TIPS spread.

Because of the relative size of the markets, a small shift of investor interest toward gold can have a magnified effect on the metal's price . . . but the same small shift in interest away from ordinary Treasury securities in favour of TIPS may have no noticeable impact on relative interest rates between the two types of securities.

By Jeffery Nichols

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