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Interest Rates, Inflation, and Trumpian Troubles Point Up for Gold

Gold prices of late have been testing support just under the market, if you will, preparing for a healthy rally into higher territory.

As I see it, a relatively small group of hedge funds and institutional speculators have been calling the tune for gold, trading the recent range, buying on dips, selling on rallies, and gradually adding to their physical holdings – a behavioral pattern we expect will continue within a rising trading range – at least until a price well above the $1300 an ounce level is well established.

Contributing to support under the market, price-sensitive Asian traders continue to bottom feed, accumulating bullion for the billions of gold-friendly households in their region with cash to spend.

Meanwhile, short-term hour-to-hour and day-to-day price action has been governed by the latest news with respect to interest rates, inflation, the dollar, and Tromp’s troubles in the White House.

Real Rates Matter Most

With respect to prospective interest rates, a growing number of financial-market participants believe an increasingly hawkish Fed will vote for a quarter-point hike interest-rate hike as early as March when the FOMC, the Fed policy-setting committee, next convenes.

Conventional wisdom suggests that rising interest rates should be bullish for the dollar and bearish for gold.

But while nominal interest rates may be rising in the next few weeks and months, real “inflation-adjusted” interest rates are already falling, as evidenced by rising inflation rates – note this week’s consumer price (CPI) and producer price (PPI) reports both rising 0.6 percent for the past month.

In my view, an accelerating U.S. consumer-price inflation rate will outpace any increase in nominal rates brought about by the Fed – a trend that will contribute to record high gold prices in the next few years.

For the immediate future, the next few weeks, confusion at the White House and a weakening President may also benefit gold as Trump’s radical policy initiatives lose support, among Republicans in the House and Senate, and the ship of state seems increasingly rudderless.

Fasten Your Seat Belts

Looking further forward, possibly even by the end of this year, there is a real chance the price of gold will recover much, if not all, of the ground lost since hitting its all-time high near $1,924 an ounce in September 2011.

For many years now, gold – real physical metal, not just paper proxies – has been moving from weak hands in the West to strong hands in Asian markets. When gold heats up, I expect a shortage of available supply, reflecting this geographic shift in ownership, will trigger a bidding war for gold, driving prices to unimaginable heights within the next few years.

Islamic Demand — Import Overlooked

Another significant source of physical gold demand – with significant price consequences – results from the recent relaxation of Islamic Sharia law making possible investment in physical gold by millions of religious Muslims around the world who, until now, eschewed gold. Many have great wealth – but strict interpretation of Sharia law has heretofore limited or prevented their investment in the metal. Within the next few years, we think Muslim demand could reach 500 tons a year, placing these investors on a par with China and India as a long-term sponge for gold.

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