NEW YORK (Dow Jones)--Financial market turmoil, inflation and low interest rates will continue supporting precious metals prices, Midas Fund's president and portfolio manager said Thursday. "There is, in fact, inflation in the pipeline coming to face consumers," president Tom Winmill said in the quarterly teleconference of the fund, which runs a gold mutual fund.
He cited increasing producer prices in particular and said they will eventually work through to the consumer.
The Federal Reserve's recent aggressive interest-rate cuts in attempts to spur economic growth in the U.S. can lead to inflation in the longer term, Winmill said.
At its March 18 meeting, the Federal Open Market Committee cut the federal funds rate target by 75 basis points to 2.25%.
Real interest rates - or interest rates that take inflation into account - are negative, and that generally is a positive indicator for precious metals, Winmill said.
That's because more investors can allocate more money out of financial assets and into hard assets, such as gold, as an inflation hedge and borrow money at low interest rates.
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Winmill also sees "strong price appreciation in the months ahead" for gold mining equities because they have been sold down amid the general stock market turmoil.
Further, supply and demand fundamentals for gold look bullish to Winmill.
"Mine supply has come down," he said. "That drop in supply is fundamentally bullish for the metals market."
He cautioned that a falloff of jewelry fabrication demand and the entry of more scrap onto the market are not bullish signs.
"That could be a storm warning on the horizon for the future direction of gold," Winmill said.
However, jewelry demand is a small portion of overall gold demand compared with the $55 trillion of potential investment demand, he said.
A lack of major mining discoveries "will put pressure on gold production over next three to five years," Winmill said, adding that political risk is becoming "more prominent" as emerging market governments are increasingly imposing royalties and revoking assets of mines once they reach production stage.
-By Matt Whittaker,
Dow Jones Newswires
March 17, 2008 04:38 ET (08:38 GMT)
Copyright 2008 Dow Jones & Company, Inc.
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