Gold prices surged Wednesday after the latest Consumer Price Index [CPI] offered investors a modest whiff of inflation. The previous metal, which is sometimes used to hedge against rising prices or inflation, rose to it best levels in seven months. Shares of gold mining companies followed the price of the yellow metal higher and the PHLX Gold and Silver Mining Index ($XAU) is now trading at its best levels of the year.

Fears of inflation were stoked Wednesday when the Labor Department reported that its CPI rose .2% last month. Excluding food and energy, the core index rose .3%, and its fastest pace since June. Economists were expecting the report to show a .1% gain in the headline number and a .2% advance in the core index.  

In congressional testimony last week, Federal Reserve Chairman Ben Bernanke said that the Fed expects inflationary pressures to moderate. However, the hotter-than-expected CPI report suggests otherwise. Consequently, the central bank might be losing credibility among some investors. As a result, expectations about the risk of future inflation are on the rise and that, in turn, helped drive gold prices higher on Wednesday.

Strength in other commodities also helped. Crude recaptured the $60.00 a barrel level early in the trading session. Meanwhile, corn jumped to ten-year highs. The gains across various markets helped push the Goldman Sachs Commodity Index to its best levels of the year. In short, the rise in commodity and consumer prices stoked concerns about inflation, which helped push gold prices sharply higher on Wednesday.

The previous metal was also boosted by a combination of short covering and flight to safety on concerns about developments in Tehran. In the latest news, Iran's President Mahmoud Ahmadinejad said his country is attempting to achieve nuclear capability as soon as possible, according to the BBC. That, in turn, has stirred up some geopolitical angst. Safe haven capital is shifting to the precious metal.

Gold for April delivery surged $21.00 to $682.10 and to its best levels since July 2006. Gold mining stocks followed suit. Newmont Mining (NEM), the largest gold miner by market value, added $1.08 to $46.98. Harmony Gold (HMY) rose 58 cents to $13.76, Goldcorp (GG) jumped $1.16 to $28.47, and Barrick Gold (ABX) rallied $1.17 to $32.11. The PHLX Gold and Silver Mining Index ($XAU), which tracks the performance of a dozen or so mining companies, rose 5.23 to 145.82 (Figure 1) and to its best levels of the year.

Figure 1: PHLX Gold and Silver Mining Index (Weekly Chart)


Frederic Ruffy
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