Gold benefits when interest rates remain low even as there are signs inflation is rising. That is precisely what’s been happening this spring.
Federal Reserve governors have clearly stated they are using their leverage to promote economic expansion and higher prices. So the central bank has held short-term interest rates down near zero, while supporting the bond market with massive purchases of Treasury securities to keep longer-term rates low as well. At the same time, pent-up consumer and industrial demand for goods and services are driving prices higher.
The Fed has said it wants to see inflation rise consistently above its traditional long-term target of two percent. It appears the central bank is succeeding.
The Commerce Department’s Bureau of Economic Analysis reported that the core Personal Consumption Expenditures (PCE) price index, which is the Fed’s favored measure of inflation, rose at an annual rate of 3.1 percent in April. The core rate excludes the volatile food and energy categories. Including food and energy, the PCE rose at a 3.6 percent rate, the fastest rate in 13 years.
Other measures of inflation are also rising. The consumer price index, for example, shot up at an annual rate of 4.2 percent in April.
Fed policymakers thus far have seen the rise in inflation as temporary, in part, a result of supply chain bottleneck and shortage supplies. That’s an indication the Fed will maintain its gold-friendly policy stance for the near future.