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Pro Trader: Silver, Gold to Keep Rising on Inflation Fears

Inflation fears were fueling a surge in precious metals Thursday morning after Hong Kong media reported that China inflation accelerated to 5.4 percent in March from the previous year. Such an inflation rate would be higher than economists estimates and would show price increases are accelerating, despite successive attempts by China’s central bank to keep prices stable.

China, which officially reports consumer price data on Friday, has struggled to clamp down on inflation in the past year. Despite raising interest rates four times and demanding banks keep 20 percent of their capital as reserves, food and fuel prices have continued to rise. Cotton and corn prices have risen more than 100 percent in the past year. Crude has climbed more than 25 percent.

Part of China’s struggle to contain prices is due to monetary inflows. China’s foreign exchange reserves hit a record $3 trillion in March, according to China’s Central Bank. More worrying than perhaps the total number is that China’s F/X reserves are up $180 billion from the end of last year — rising during a period when China was actually running a trade deficit.

Geopolitical issues and U.S. monetary policy have complicated China’s inflation fighting efforts. Poor weather in many grain-producing nations — and devastating floods in Australia — have created fears of grain shortages, boosting prices. Wheat futures are up nearly 55 percent in the past year. Meanwhile, Libya’s civil war and unrest in other oil producing nations such as Nigeria have caused crude prices to spike this year. Crude futures are up more than 18 percent.

U.S. monetary policy also has not helped inflation-fighting efforts. U.S. Federal Reserve efforts to bolster the economy after the housing and financial crisis, as well as the government’s growing debt, have weakened the dollar. The U.S. dollar hit a fresh 16-month closing low against the euro yesterday, and continued to decline on Thursday. International commodity prices are typically expressed in dollars, so a weaker dollar leads to higher prices.

China is not the only country feeling inflation pressures. The European Central Bank raised rates 25 basis points this month after Euro Zone inflation hit 2.6 percent annually in March. Core producer prices in the U.S. rose a greater-than-expected 0.3 percent in March. Much of that, however, was due to higher auto prices stemming from supply-chain issues in Japan, which is still struggling to recover from last month’s devastating 9.0 earthquake and tsunami.

"We do not believe that food and energy price gains are transitory," wrote Deutsche Bank Chief Economist Joe LaVorgna in an April 14 note to clients. "Over the last three years, food and energy prices are up 1.9 percent, but over the past year, they are up 5.9 percent. We doubt this trend will subside in the face of negative real interest rates and a sharply falling trade-weighted dollar."

To cash in on rising inflation, Joe Terranova of Virtus’ Investment Partners was looking to add to his gold and silver positions. Based on Thursday's action, he thinks both gold and silver are breaking out.

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