Will Monetary Policy and Inflation Continue to Support Gold?

Earlier this week, gold and silver prices jumped after Ben Bernanke delivered a speech that sparked more quantitative easing speculation.  However, both precious metals have since given up gains as investors continue to employ a “buy the dip, sell the rip” trading mentality.  According to CPM Group, a commodities research and investment company, this is a trend that is likely to continue, but gold prices should receive support.

CPM Group just released its Gold Yearbook 2012, a comprehensive source of information, statistics and analysis on the international gold market.  Although gold prices reached a new nominal high of $1,920 per ounce last September, the company said gold prices are unlikely to set a new nominal high due to reduced fears of a global financial system breakdown.  Last August, Standard & Poor’s credit agency downgraded the U.S. credit rating for the first time.  In regards to a gold spike towards $2,000 or more, the report says, “Such a spike seems unlikely to CPM Group, which suspects that the peak in September last year may provide to have been the cyclical peak in an ongoing bull market.”

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While investors appear to be more sensitive to gold prices, CPM Group expects gold prices to stay above $1,500 this year and above $1,400 over the coming years.  The report cites large debts and currency market volatility as issues providing support for gold prices. “These factors should remain supportive of gold prices, keeping them at historically high levels, but it may be that these issues will not push gold prices significantly higher from present levels on a sustained basis,” explained CPM Group.  The price of gold started the year just below $1,600 and currently trades near $1,650.

Another factor relating to gold support is loose monetary policy and the likelihood of it leading to inflation.  CPM Group states, “Such monetary policy is typically supportive of gold prices because of its potential inflationary impact. Investors could demand more gold if conditions deteriorate further, but they also have other options such as equities and real estate.”  In the latest consumer confidence report released on Tuesday, expectations for inflation jumped from 5.5 percent to 6.3 percent, the highest level since May 2011.  Furthermore, General Mills reported in their latest financial results that input cost inflation increased 10-11 percent, compressing margins.  While other options such as equities and real estate are available, they face problems of their own.  High frequency trading and poor fundamentals have raised concerns in equities, while lingering high unemployment and tight bank lending can make real estate a difficult option for investors.

Although gold and silver prices have fluctuated during the past decade, the general trend has been higher.  Using CPM Group’s support levels of $1,400 and $1,500 for gold, it appears that the precious metal has more upside than downside.  Loose monetary policies such as ultra-low interest rates and excessive government spending plagued the past decade and look to plague the foreseeable future as well.  The amount of precious metals one should hold in their portfolio is often debated, but many would agree at least a small portion of an investor’s portfolio should hold gold or silver as a hedge against global uncertainty and inflation.

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Disclosure: Long EXK, AG, HL, PHYS

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com