- Gold prices ticked up after the recent inflation report and on a softening dollar
- Overseas demand is increasing with China leading the way
- Potentially smaller interest rate hikes and continued inflation make an ideal buying opportunity
Gold Demand Increasing
Demand for gold is going up around the globe. China is the world’s largest gold consumer. The World Gold Council said Chinese demand for the precious metal is booming. It increased as the price of gold fell and strict covid restrictions were lifted. Also, Chinese investors sought safe haven assets as their local stock market fell. In a traditionally quiet season, the Shanghai Gold Exchange had its strongest July since 2015. Gold imports were at their highest in five months to help meet the demand.
In the US, gold rallied as well. Gold prices had gained on Tuesday due to a weaker dollar. A weaker dollar makes gold less expensive for overseas buyers. Gold prices have gained for three consecutive weeks and are working on a fourth.
US Mint data show that gold coin sales are trending up. Annualizing current sales suggest that 2022 sales could surpass full year 2021. Sales would go up from 1.6 million ounces in 2021 to 1.9 million ounces in 2022. This would represent the strongest year of sales since 1999. 1
Gold, Inflation, and Interest Rates
Gold ticked up after the July inflation data was released. Inflation appears to have cooled a small amount. It came in at 8.5%. Down, but still hovering near its highest rate in four decades. Markets had expected it to come in at 8.7%. This follows last month’s record shattering 9.1% inflation rate. 2
Gold jumped to a fresh daily high of $1,824 an ounce in reaction to the inflation data. “For gold, the slowdown in inflation could trigger substantial buying,” said analysts at TD Securities. Investors consider the precious metal an inflation hedge. Gold benefits when inflation is running high, and rates are flat. Investors move to gold as the purchasing power of currency shrinks. But higher interest rates make the non-yielding bullion less attractive. 3
Investors are getting bullish on the hope that a lower inflation rate may cause the Fed to slow down or stop their aggressive interest rate hikes. The Fed is trying to bring soaring prices under control by raising interest rates to tamp down demand.
However, the Fed is having a tough time figuring out how to react to recent data. Last week’s better-than-expected labor market report challenged their plans. The report showed employers added 528,000 jobs last month.
“If those numbers are to be believed, we generated over a half-million new paychecks in the month of July, which is a lot of extra income,” said an analyst at KPMG. “Even if individuals feel like they’re losing ground relative to inflation, that extra income is supporting demand, keeping upward pressure on prices.” 4
Investor excitement should be tempered by reality. The small drop in inflation is mostly due to falling gasoline prices. Core inflation paints a different economic picture. It takes out volatile food and energy costs. That rate remained virtually unchanged since last month. Regular Americans are still feeling the bite of inflation. Prices are rising faster than wages. Workers’ purchasing power is being chipped away. Average wages in July were up only 5.2% from a year ago — well short of the inflation rate.5
Thus, rate hikes are still coming. Only now, there is a slight chance they won’t be as epic as the last two increases. As a result, gold is in a perfect position. Prices look set to rise as higher interest rate headwinds die down. But the need for inflation protection remains. Contact us about a Gold IRA today to take advantage of this opportune moment.