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(Kitco News) – Inflation is becoming a worldwide problem and that could be good for gold prices as investors are starting to expect central banks to maintain their aggressive monetary policies and potentially push the global economy into a recession.
In the U.S., inflation remains persistently above the Federal Reserve’s target of 2%; however, the European economy faces an even more significant threat as analysts warn that record core inflation indicates higher consumer prices are becoming entrenched.
For the past three months, core inflation in Europe has reached record limits.
Thursday, Eurostat reported that core inflation for the year rose 5.6% in February, significantly beating expectations for consumer prices to hold at 5.3%.
At the same time, headline inflation, while elevated, rose at a slower pace of 8.5%, versus January’s annual rise of 8.6%. However, inflation was still hotter than expected.
The latest economic data is causing economists to adjust their expectations regarding the European Central Bank’s monetary policies. Many economists were looking for the ECB to raise interest rates by 50 basis points at its next meeting and then hold rates steady for the rest of the year.
Like growing sentiment in the U.S., analysts expect the ECB to raise interest rates higher and maintain their aggressive monetary policy longer than initially anticipated.
“February’s increase in core inflation will reinforce ECB policymakers’ conviction that significant rate increases are needed. For some time, we have been forecasting a 50bp hike at the meeting in two weeks’ time and another in May, but further hikes at later meetings now look increasingly likely,” said Jack Allen-Reynolds, deputy chief Euro-zone economist at Capital Economics said in a note following the inflation data.
A consensus is now building for the ECB’s deposit rate to peak at 4%, up from its current level of 2.5%.
In North America, markets see a growing possibility that the Fed Funds rate will peak at 6% from its current range of 4.50% to 4.75%.
Despite the growing hawkish rhetoric on either side of the Atlantic, the gold market appears to be holding its own. Spot gold against the U.S. dollar is trading at $1,836.60 an ounce, roughly flat on the day.
Meanwhile, gold is holding near session highs against the euro, last trading at €1,734.12 an ounce, up 0.74% on the day.
Some commodity analysts note that bullish potential for the euro, as the ECB has to hike rates more than the Federal Reserve, provides some momentum for gold in the near term.
“We think EUR/USD is finding a base here, partly because the US rates market has priced a lot in now, and partly because the European rates market has more to price in,” wrote Currency analysts at Société Générale in a note Thursday
Commodity analysts have said that any weakness in the U.S. dollar would be positive for gold.
From a broader viewpoint, hot inflation also presents a unique opportunity for gold as investors worldwide look to preserve their purchasing power.
In a recent interview with Kitco News, Michele Schneider, director of trading education and research at MarketGauge, said that she sees gold prices breaking to new highs this year as central banks, specifically the Federal Reserve, won’t be able to bring inflation down.
“Fed rate hikes can slow the economy, but there is not much they can do when inflation is a global problem,” she said. “It’s going to take just one little catalyst to ignite a bigger rally in gold.”
In a webinar hosted by the London Bullion Market Association, Thorsten Polleit, chief economist at Degussa, said that while rising interest rates poses a threat to gold, there is a risk that central banks break the economy by overtightening.
He added that this environment should be positive for gold as he sees prices surpassing $2,000.
“I believe central banks will overdo it, raising interest rates too much and damaging the economic cycle and financial markets to such an extent that their monetary policy tightening will need to end and be reversed later this year,” he said.