After a long slumber, inflation is on the rise in response to robust economic growth and a tightening labor market. As a traditional hedge against inflation, gold should perform well under such conditions.
The Producer Price Index is rising at its fastest pace in six years, up 3.1 percent over the 12 months ending in November, according to the Bureau of Labor Statistics. The PPI rose a higher-than-expected .4 percent during November, while the core wholesale inflation rate, which excludes the most volatile components, food and energy, also jumped .4 percent during the month. Core wholesale inflation for the 12 months ended in November climbed at its quickest pace in more than three years, up 2.8 percent. Producer prices are a leading indicator of inflation, and usually filter down to consumers in a matter of months.
“This demand-led price push from higher commodity prices is a classic early warning signal that consumer goods will also see increasing inflationary pressure,” Chris Rupkey, Chief Economist of MUFG in New York told Reuters.
The Federal Reserve on December 13, raised its benchmark short-term interest rate – the federal funds rate – by ¼ of one percent, to a range between 1.25 and 1.5 percent, an effort to slow down the growing economy and ensure that inflation does not overheat. The Fed said it intends to stick to its plan of raising interest rates three times in 2018, easing worries of some gold traders who were concerned the Fed might raise rates more aggressively.
In an environment of rising inflation expectations — but not dramatically higher interest rates — gold is positioned for strong performance in 2018.