Gold rises as investors respond to inflation scare

The price of gold rose to its highest in more than three months on Monday after a US inflation scare last week that increased volatility on stock markets and resurgence of Covid-19 cases in parts of Asia.

Gold, which rallied to more than $2000 an ounce last summer before falling back after global drugmakers announced effective coronavirus vaccines in November, rose 0.7 per cent to $1,854 an ounce — its highest since February 2.

The yellow metal tends to do well in times of heightened uncertainty on stock markets and is often bought by investors as a hedge against inflation.

“Markets are climbing a wall of worry,” said Grace Peters, investment strategist at JPMorgan private bank. Stock market investors had had an “easy ride” in the first stage of economic recovery from the coronavirus pandemic in the US, Peters added, “and now we have the concept of peak [economic] data coming in and things are getting more volatile”.

Global stocks experienced their worst week since late February last week after data showed US consumer price inflation rose 4.2 per cent in April, year on year, its highest since 2008. While sustained inflation erodes the real returns from stocks and bonds, investors are currently unsure whether April’s rise was a result of one-off effects from industry shutdowns last year caused by coronavirus.

In stock markets on Monday, Europe’s Stoxx 600 index traded flat while the UK’s FTSE 100 fell 0.2 per cent. Japan’s Nikkei 225 closed 0.9 per cent lower and Taiwan’s Taiex dropped 3 per cent, taking its drop so far in May to 12.6 per cent.

The yield on the 10-year US Treasury bond, which moves inversely to its price, dipped 0.02 percentage points to 1.617 per cent.

The government of Taiwan, which has been one of the most successful in the world at containing Covid-19, announced 335 new cases of the virus on Monday and introduced strict new social distancing measures. Singapore reported 49 new infections and announced school closures while Trinidad and Tobago introduced a new state of emergency as it battles its third wave of the pandemic.

China’s CSI 300 closed 1.5 per cent higher as investors bought up shares in healthcare companies. Futures markets indicated the S&P 500 would lose 0.2 per cent in early Wall Street dealings.

JPMorgan’s Peters said she expected stock and bond markets to stay “rangebound over the summer” as investors anticipated the US Federal Reserve, the world’s most influential central bank, would start commenting on when it would reduce the $120bn in monthly bond purchases that have boosted financial markets through the pandemic.

“The Fed is going to find it increasingly difficult to justify its extremely easy monetary policy stance” as inflation expectations increased, said Will Denyer of research house Gavekal.

A survey by the University of Michigan last Friday showed consumers’ expectations of price rises over the coming five years were at a decade high of 3.1 per cent. Professional forecasts surveyed by the Philadelphia Federal Reserve also now expect average consumer price inflation of 2.3 per cent, above the central bank’s target, for the next 10 years.

“These forecasts are not going to cause the Fed to panic and start tightening aggressively,” Denyer said. But they were “one more indication that crisis-level monetary policy is no longer warranted”.

In currency markets, the dollar index that measures the greenback against trading partners’ currencies was flat. The euro was steady at $1.1213. Sterling also traded flat against the dollar at $1.1409.

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