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LGT Navigator: Inflation concerns fuel gold demand

May 18, 2021

On Wall Street, concerns about rising inflation have once again gained the upper hand and led to losses. Investors are seeking protection in gold, which is reflected in rising prices for the precious metal: the fine ounce of gold is as expensive as it was last three and a half months ago. Meanwhile, the Vice Chairman of the Federal Reserve reiterates that the Fed will stick to its expansionary monetary policy course.

Gold price

US stock exchanges started the new week with losses. After the major indices had ended the previous week with gains, the concerns about rising inflation and higher corona case numbers in parts of the world weighed on stock market sentiment. The S&P 500 lost -0.3% to 4'163.29 and the Dow Jones declined -0.2% to 34'327.79, while the Nasdaq Composite slipped -0.4% to 13'379.05. 

In Asia, stock markets are trading firmer on Tuesday. The Nikkei gains +2.3% in Tokyo, defying recent economic data. Japan's economy contracted an annualized -5.1% from January to March, after growing in the previous two quarters. The Hang Seng in Hong Kong advances +1.2% and the Shanghai Composite trades almost unchanged. 

Gold price soars

The gold price is rallying at the beginning of the week and climbed to the highest level in three and a half months. The fine ounce cost up to USD USD 1'868.27 and was thus as expensive as last at the end of January. Analysts explain the increase in the price of the precious metal with the rising inflation expectations in the US. Concerns about higher inflation received a further boost last week, as consumer prices rose unexpectedly sharply in April. Gold has traditionally been used as a hedge against inflation.

Since the Federal Reserve has repeatedly signaled that it does not intend to adjust interest rates for the time being, the opportunity cost of investing in the metal remains low. That position was reiterated Monday by Richard Clarida, the Chairman of the Atlanta Federal Reserve. The economic progress is not yet so great that a change of course in monetary policy is indicated, he explained at an online conference. While there is upward pressure on prices, it is likely to be temporary, the Vice Chairman of the Fed said. In addition, he assured that the Fed will give financial markets a heads-up if it makes any adjustments to the bond-buying program.

The focus now shifts to the minutes of the last interest rate meeting of the Fed (Minutes), which will be published on Wednesday. Investors are hoping that this will provide further indications of how the central bank views the inflation trend. 

EU and US want to settle trade dispute

The dispute over special tariffs on steel and aluminum imports from the EU to the US is gaining momentum as the two parties want to settle the conflict by the end of the year. The trade dispute has been simmering since 2018, when former US President Donald Trump imposed special customs on imports from the EU, citing national security interests. The EU had then imposed tariffs on American imports, including whiskey and motorcycles. Now, the EU's planned tightening of import duties is to be suspended for the time being, in order to focus instead on settling the conflict.

Industrial sentiment in New York deteriorates

Sentiment among industrial companies in the New York metropolitan area clouded in May. The Empire State Index, which measures industrial activity in the state of New York, fell 2 points from the previous month to 24.3, according to the Federal Reserve Bank of New York. Analysts had expected a decline to 23.9 points. Orders and shipments continued to recover, however, prices for raw materials and inputs have risen sharply, the report said. In addition, delivery times have lengthened. The developments are likely to be the result of the economic upturn, which is leading to an increase in production worldwide.

Swiss producer prices rise

Producer and import prices in Switzerland rose in April, increasing by 1.8% year-on-year, the statistics office reported. This was after prices had fallen at the beginning of the year. In particular, rising global commodity prices are responsible for the increase in prices. The development could also boost inflation: the producer price index is regarded as a leading indicator for consumer prices, as producers normally pass on higher costs to consumers. 

Prices are also picking up in Italy. According to the Istat statistics office in Rome, inflation rose by +1% year-on-year in April, with energy prices in particular increasing.

Economic Indicators May 18

MEZ Land Indikator Letzte Periode
11:00 EZ GDP (Q1, y/y) -1.8%
14:30 US Building permits (April, m/m) +2.3%
14:30 US Housing starts (April, m/m) +19.4%

Earnings Calender May 18

Land Unternehmen Periode
IT Generali Q1
FR Engie Q1
UK Vodafone Q1
US Walmart Q1
US Home Depot Q1

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Source: LGT Bank (Switzerland) Ltd.

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