May 21, 2021 - Economy

Gold bounces back amid inflation fears

 Data: S&P Capital IQ; Chart: Will Chase/Axios
Data: S&P Capital IQ; Chart: Will Chase/Axios

Gold is back in vogue. After a selloff at the start of the year, prices have bounced 10% in less than two months.

Why it matters: Gold is often seen as an inflation hedge, so its rebound signals growing concerns about whether the current round of inflation is transitory, as the Fed says it will be. Gold is also a safe haven asset for investors who want to rotate out of riskier plays.

Reality check: Economic data surprises this last month have helped support a return to gold.

  • The huge miss on April jobs numbers, combined with a greater than expected uptick in the Consumer Price Index, have taken the shine off expectations for a smooth-sailing recovery.

On the flip side: Six months ago, with vaccines on the rise and serious inflation concerns in their infancy, "there was no reason to be in a safe haven trade like gold," Ed Moya, senior market analyst at OANDA, a trading services provider, tells Axios.

Also, bitcoin: "Institutional investors appear to be shifting away from bitcoin and back into traditional gold, reversing the trend of the previous two quarters," JPMorgan analysts wrote in a research note this week.

  • "It is not clear what is driving this shift," they note, adding that investors may be seeking stability in the midst of the rapid losses in the crypto market.

Other factors at play include a weaker dollar, which is typically good for gold since it enhances gold's relative purchasing power. The dollar has turned lower against most major currencies in recent weeks, Axios' Dion Rabouin recently reported.

  • Gold demand from China is also reportedly surging, as the Chinese government has given the go-ahead for banks to stock up on the precious metal, Reuters reported last month.

What to watch: A taper tantrum?

  • "When the punchbowl gets smaller, it's risk-off for equities," says Moya. "That's when you'll probably see investors become a little more skittish on stocks, and continue to go into gold."

Go deeper: Central bank taper timelines start to come into focus

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