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Prognostications abound for gold prices in 2011. Many of these forecasts consider the outlook for inflation, currencies and interest rates in the world’s largest economies. Let’s take a closer look at why.
Gold prices generally rise during times of actual or projected inflation because of gold’s traditional status as a “safe haven” asset. Gold buyers seeking an asset which reacts favorable to inflation or currency devaluation often move from the falling currency into gold.
Currently, the Federal Reserve is more concerned with deflation than inflation and, as suchh, as shown little reluctance to flood the U.S. economy with more dollars. In contrast, countries like China and India are seeing relatively strong economic growth and, with it, higher inflation. China’s prices are 5.1% higher than a year ago, while India is projecting inflation will be 5.5% by March 2011.
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The correlation between higher inflation and higher gold prices isn’t set in stone, however. While more inflation can be favorable initially for gold prices, the countervailing economic policy of raising key interest rates to temper inflation can sometimes make interest bearing instruments more appealing to investors at the expense of gold. But, so far, rates have not been raised to levels high enough to impact gold prices, or in China’s case, they’re not been raised at all.
Historically January and February are good months for gold; in past years, buyers have bought back gold positions that they shed heading into the New Year.
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Continuing inflation concerns could help support gold prices in 2011. According to Reuters, the Reserve Bank of India said that inflation is not slowing as quickly as it wants. In the U.S., stories are surfacing of companies that are experiencing higher costs for materials or staffing, but these costs are not yet being passed on to their customers in appreciable amounts.
“The two pillars of gold are, in any country’s currency, are negative real interest rates and deficit spending,” says Frank Holmes, CEO of U.S. Global Investors. Holmes thinks that low interest rates won’t be going anywhere anytime soon as “it would be catastrophic for the financial system.”
We’ll be watching interest rate policies and inflation reports in 2011 as part of our ongoing coverage of economic news of interest to gold buyers.
(Sources: “Gold Prices Biding Time Until 2011,” TheStreet.com, December 22, 2010; World Gold Council statistics)
