Gold could test new highs amid higher inflation, analyst says

Gold could still test new highs this year, according to David Lennox of Fat Prophets, who said he sees “a pretty big tick” ahead of the precious metal’s prices.

Gold prices have been mixed so far this year. Since the start of 2021, spot gold has gained around 0.66% – recovering some gains after a fall in March that saw prices drop below $ 1,700 an ounce. It is currently trading at around $ 1,911 an ounce.

Inflation in the United States is still very much in the spotlight as the central bank has kept the financial system filled with liquidity. Since last year, the Federal Reserve has kept interest rates low and bought back treasury bills, with the aim of stimulating the economy affected by Covid and keeping financial markets afloat.

Speaking to CNBC’s “Squawk Box Asia” on Monday, the resource analyst pointed to recent inflation data in the United States which showed prices were rising as the index of basic personal consumption expenditure for April was faster than expected on Friday. The measure is considered by central bank officials to be the best indicator of inflation.

Higher inflation readings should be a “boon” for gold, a physical asset, Lennox said.

“Inflation is back because we’ve seen such a significant increase in the US money supply,” he explained. “Whenever we’ve seen this surge in the past, it’s been accompanied – probably five or six months later – by higher inflation.

Depending on one’s investment horizon, there are two ways to participate in the expected gold rally, Lennox suggested.

“At this point, we suggest that if we see a big spike in the price of gold, then you can look for a gold ETF where you get that individual price movement – of course minus the management fee,” he said. said, “It gives you really good exposure.”

For those investing for the long term, however, Lennox said they should consider exposure to gold miners instead.

“(The miners) have the ability to increase their production in the future and they also pay dividends, so you get some of that back,” he said.

Meanwhile, the dollar is also expected to weaken and could be another potential tailwind for gold – seen as a safe investment asset in times of uncertainty in the markets.

“We have growing debt, we have more physical money inside… the pool of US dollars,” Lennox said. “These two factors in themselves suggest that we are going to see a weaker US dollar in the future.”

In addition, the economies of major currencies that trade against the US dollar are in some cases doing better than the US, he said without giving further details.

“We think there is still (dollar weakness) to be done and that will be a very good tailwind for the price of gold and precious metals,” Lennox said.

– CNBC’s Jeff Cox contributed to this report.