(Kitco News) – Although gold prices have been stuck in a rut around $1,200 an ounce for five weeks, one precious-metals analyst sees potential for the yellow metal as U.S. investors are ignoring growing domestic political and inflationary risks.
In a report released late Monday, Jonathan Butler, precious-metals strategist at Mitsubishi Corp., noted that the U.S. mid-term elections are less than two months away and the results could have implications for the U.S. dollar and in turn gold prices.
“It is no secret that Donald Trump’s presidency hinges on the mid-term elections – if the Democrats gain control of the House of Representatives in November, impeachment proceedings could begin in fairly short order,” Butler said. “The political uncertainty engendered by an impeachment could see the dollar lose ground and give some support to gold.”
Aggregated polling data shows that Democrats have a more than eight-point lead over Republicans in a generic congressional vote ahead of the Nov. 6 election.
“With the market becoming one-sided towards risk assets in the current economic climate, there is a danger that the current U.S. political risks will be overlooked,” Butler said.
The second factor Butler sees supporting gold prices through the rest of the year is inflationary pressures. He noted that inflation is already at the Federal Reserve’s 2% target as the economy continues to grow and the labor market tightens.
“It would not take much for inflation to outstrip nominal rates, increasing the attractiveness of gold as an inflation hedge,” he said. “The key question is if U.S. growth can remain on track, allowing President Trump to claim electoral credit for his tax cuts and for the Fed to maintain a steady rate hike path that will keep inflation in abeyance.”
While there are supportive factors for gold down the road, Butler acknowledged that the market still has to deal with difficult headwinds in the near term, manly the strong U.S. dollar. The greenback continues get find support as a result of rising trade tensions between the U.S. and China.
However, despite the continuous threat of from a stronger U.S. dollar, the gold market has been relatively resilient as it hold above critical psychological support at $1,200 an ounce. December gold futures last traded at $1,205.60 an ounce, relatively unchanged on the day.
Late Monday, the U.S. government announced that it would levy a 10% tariff on $200 billion in imported Chinese goods. Butler explained that the U.S dollar is finding strong support in this environment because the nation’s strong domestic economy and growing expectations that the trade conflict will reduce the country’s trade deficit because of fewer imports.
By Neils Christensen
For Kitco News