Gold rises to five-month high as inflation fears grow

Gold hits five-month high as fear of inflation and a weak dollar prompt investor interest

The price of gold rose to its highest level in five months early on Tuesday morning, driven in large part by the ongoing anxiety surrounding inflation and the weakness of the dollar.

In mid-morning trading, spot gold climbed as high as $1,916.28 per troy ounce. Just under three months ago, the yellow metal had traded below $1,700.

Investors attracted by traditional safe-haven

The commodity’s rise can largely be considered a reaction to the measures implemented by governments and central banks in the wake of the COVID-19 crisis, with rampant quantitative easing and record low interest rates prompting investors to look for traditional stores of value.

A desire for an inflation hedge, coupled with coronavirus uncertainty, drove gold to a new all-time high of $2,074 last August. Although the rollout of vaccines and the gradual reopening of the global economy undid much of the momentum, gold’s attraction has grown once again as the prospect of higher inflation has become more of a reality.

In April, the US consumer price index rose by 4.2% year-on-year to its highest point since 2008, while the core personal expenditures (PCE) index jumped 3.1% to its highest level since 1992.

With President Joe Biden last week unveiling a $6trn budget for 2022 in addition to the multi-trillion dollar stimulus packages introduced in the midst of pandemic restrictions, the expansionary approach of recent years shows no sign of letting up.

European inflation fears

Nor are inflation concerns an exclusively American phenomena. On Tuesday, the latest data from Eurostat found that inflation in the 19 euro zone nations increased from 1.6% to 2% between April and May. The European Central Bank currently aims for inflation “below but close to 2%”.

Last week, the Bank of England’s chief economist Andy Haldane warned that the United Kingdom must avoid an inflation spike. Speaking to the Treasury Select Committee, Mr Haldane stated:

"With this degree of unprecedented-in-peacetime fiscal and monetary stimulus being injected into an economy... that's why I reached my own judgement about why we needed to turn off the tap."

By mid-afternoon, spot gold traded lower at $1,907. This was largely a result of a stronger dollar. Having traded at a three-year low earlier in the day, the dollar strengthened by 0.5% against sterling at £0.7063.

Further reading: Pound rises to three-year high

Further reading: Royal Mail jumps 7% following JPMorgan vote of confidence

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