Gold prices were on track in mid-October for their biggest weekly rise since May, buoyed by a weaker dollar, but expectations of a tapering of U.S. monetary stimulus could limit further gains.
Gold prices were heading for a rise of more than 2 percent in the week to mid-October. The yellow metal was down 0.08 percent at $1,793.92 per ounce on October 15.
Bullion was supported by an increase in U.S. consumer prices, although figures on October 14 showed U.S. producer prices posted their smallest gain in nine months in September.
U.S. consumer inflation rose solidly in September, driven by increases in prices of food, rent and other goods, according to data on October 13.
Supply chain constrictions are aggravating price pressures and dragging on economic growth.
“The higher inflation is allowed to rise, the ever-greater will be the loss of buying power of the domestic currency,” wrote Lawrie Williams, gold price commentator with bullion dealer Sharps Pixley.
“This will, in turn, lead to those looking to protect whatever wealth they may have turning to tried and tested safe havens like gold.”
While gold is often viewed as a hedge against inflation, reduced monetary stimulus, including expectations that U.S. interest rate rises may come earlier than previously expected, push government bond yields higher and raise the opportunity cost of holding bullion, which bears no yield.
Some analysts believe that gold is undervalued because U.S. monetary authorities have been signalling that inflationary pressures are transitory. Evidence of more prolonged ongoing price pressures may spur more gold buying.
For UK-based gold savers, the pound hit a two-week peak in mid-October, underpinned by receding fears of a trade war between the EU and the UK, and on growing sentiment that the Bank of England could move to raise interest rates from their current historic lows earlier than previously expected, possibly as soon as this year. Previously many analysts had predicted the UK central bank would not raise rates before late next year at the earliest.
Currency markets are focusing on whether expectations of a possible UK rate hike later this year, are premature, with some analysts sensing that it may still be too soon to risk destabilising the economic recovery as pandemic restrictions ease.
If trade tensions between the UK and EU do pick up again, further gains by sterling against the dollar may be limited.
The current combination of a firmer pound and a softening dollar, augurs well for UK-based gold savers looking to add to their holdings of dollar-denominated bullion.
