Gold Moves Towards $1,150 After Tepid Inflation Data

Today, the price of gold moved towards $1,150 per ounce, as inflation figures remained tepid and the U.S. dollar stayed under pressure. Consumer Price Index (CPI) data released this morning showed a 0.2% gain in October versus the previous month and up 1.7% when food and energy were stripped out. The CPI figures were roughly in line with expectations and follows yesterday’s similarly benign release of Producer Price Index (PPI) data. The PPI came in slightly lower than expectations, at 0.3% versus a projection of 0.5%. Excluding food and energy the PPI registered at 0.6% versus 0.1%.

With inflation expectations contained, the Federal Reserve, the Obama administration, and Congressional leaders are under no pressure to discontinue their efforts to stimulate the economy through aggressive use of the public’s balance sheet. The U.S. dollar has been a casualty of this effort and the rising gold price has served as a barometer for investors’ distaste for the greenback. Closing at $1,141.55 per ounce, the gold price has risen $95.90 thus far in November and $256.90 in 2009.

Investors have flocked to investments that offer leverage to the gold price, including gold-backed ETFs and gold mining stocks in anticipation of further U.S. dollar depreciation. It is not solely private investors that have accumulated gold positions. In what has emerged as an increasingly popular trend amongst foreign central banks, the central bank of Mauritius announced that it has purchased two metric tons of gold from the International Monetary Fund (IMF). The transaction was valued at $71.7 million, increasing the central banks’ foreign exchange reserves to 5.69% from 2.34%. Mauritius joins both India and Sri Lanka as nations whose central bank has announced gold purchases in the last few weeks - headlined by India’s $6.7 billion addition to its gold reserves. Speculation has arisen that the Chinese central bank is considering a purchase, as the IMF still is in the midst of its 403 metric ton sale announced earlier this year.

Concern with respect to the plight of the U.S. dollar has been growing in recent months, evidenced by the DXY trading near a 15-month low - down roughly 40% over the past decade. However, there is a small, but growing contingent of investors and market commentators arguing that the dollar’s demise is overstated and a rapid rise in the greenback is on the horizon. Hugh Hendry, fund manager of Eclectica, penned in his November letter to investors with respect to the U.S. dollar, “We have already had the devaluation. Now with China rebuilt, and the trade deficit in full retreat, there are less dollar bills being exported overseas to ungrateful recipients. Is it not time we drop our fascination with the present and consider the future? Is it really inconceivable that the dollar could now strengthen?”

Hendry’s view is that the new investment mantra of “anything but the dollar” is bound to end badly and deflation, not inflation, is the larger concern. Gold bears, such as Seabreeze Partners’ Doug Kass, point to the gold purchase by the small island nation, Mauritius, as a signal that the gold trade has entered bubble territory.

At the other end of the spectrum lies the recent and highly publicized entrance of high profile institutional investors into the gold sector - consistent with the opinion of legendary investor, Jim Rogers. In an interview published earlier this week by thestreet.com, Mr. Rogers reiterated his enthusiasm for gold stating, despite new highs in the gold price, “I don’t think this is the top … In my view, in this bull market in commodities, gold will make all new highs adjusted for inflation.” With the January 1980 inflation-adjusted high equating to roughly $2,350 per ounce, the gold price would need to rise 106% to reach that level.

While the inflation versus deflation debate rages on, the current battle is being won by proponents of the former and investors are seeking refuge in gold holdings as protection from the potential inflationary consequences of policymakers’ actions.

Gold Price News provided by GoldAlert.