As the onset of QE2 and ongoing concerns over the health of the eurozone continue to plague currency markets, many investors have sought to limit their exposure to fiat currencies and establish larger positions in the precious metal and commodity markets. However, as worries over the eurozone -- especially with regards to Irish debt -- drive down demand for the common European currency, the dollar has made a small surge as of late, with the U.S. dollar index posting gains of 2.5% during the month of November.
This strength in the greenback has combined with growing fears over a commodity bubble to punish precious metal and soft commodity investors over the near term; sugar prices were off more than 18.5% over the past week while gold saw its value decline by a much more modest 5% over the past five days. While the events in many of the soft and grain markets can be explained by supply and demand issues, the same cannot be said for gold, which has not had the same volatility in supply over the past few weeks and is instead regarded as a currency of its own by many traders. This gold "currency" is heavily dependent not only on investor fears about the global markets but the health and inflation expectations for the U.S. dollar as well [read Gold ETFs: Boom Or Bust?].
For these reasons, today's report of the October Consumer Price Index looks to weigh heavily on the precious metal markets. Analysts expect that the CPI level will show a month-over-month change of 0.4% while core CPI -- less food and energy -- will likely come in just above zero at 0.1%. If these numbers hold up, it will make for a 0.7% year-over-year gain, the lowest annual CPI gain in close to 50 years, a figure which could ease investor fears over imminent hyperinflation and reduce demand for the yellow metal. "I don't think that realized inflation like CPI is likely to surprise meaningfully to the upside for a while," said Adrian Cronje, chief investment officer for Balentine. "It's inflation expectations in the future that matter. Inflation can become a self-fulfilling prophecy if expectations are not kept in check." [see The Ten Commandments of ETF Investing]
Due to this CPI reading and its likely impact on gold given the yellow metal’s recent plunge, we look for the SPDR Gold Trust
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Disclosure: Eric is long gold bullion and IAU.
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