Wednesday, April 6, 2011

David Levenstein Says Gold Will Benefit From Return Of Inflation

Mr. Levenstein is one of those analysts who sees the increased hawkishness in the Fed and European Central Bank as being a net positive for gold. It's a signal that inflation is coming back, which gold will feed off.
The euro soared against other European majors as well as the yen last week, and at the same time, it remained firm against the dollar. Recent stronger-than-expected inflation data strongly suggests that the ECB is likely to raise rates in April and probably rate hikes in the future. The Eurozone CPI rose from 2.4% to 2.6% year-on-year in March, the highest level since October 2008 when CPI was at 3.2% year-on-year. This was also the fourth consecutive month that inflation has remained above the ECB's 2% target. It is widely expected the ECB will raise rates this week by 25bps from historical level of 1%. The upcoming ECB meeting this Thursday will be a closely watched event and President Trichet's comments at the press conference after the announcement will surely move prices.

While the next FOMC meeting will not be held until April 24, speeches from Fed members will be closely watched. Recent comments from Fed presidents have turned more hawkish. Philly Fed President Charles Plosser said "signs that inflation expectations are beginning to rise or that growth rates are accelerating significantly would suggest that it is time to begin taking our foot off the accelerator and start heading for the exit ramp". He also added 'it's certainly a possibility' for the Fed to raise interest rates before the end of the year. The issue is 'definitely on the table but it will depend on how things play out over the next few months'. In a separate statement, Dallas Fed President Richard W. Fisher said it 'makes a lot more sense' to stem stimulus measures as unemployment fell and the US' growth is 'self-sustaining'....
In addition, the monetary base in Japan got a huge boost due to the earthquake. Trouble continues to stalk the Middle East and Libya. Despite gold reaching record highs, demand in Hong Kong is still quite strong.

It's hard to argue with his take on gold, as it's largely an explanation of why the metal's taken off. The only negative kicker in the near term I can think of is the European Central Bank raising its rate to 1.5% instead of to 1.25%.

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