Gold could test new highs this year. One analyst shares his investing ideas

Gold could test new highs again this year, according to David Lennox of Fat Prophets, who said he sees “a fairly big tick” ahead for prices of the precious metal.

Gold prices have been mixed in so far this year. Since the start of 2021, spot gold has gained about 0.66% — clawing back some gains after a March stumble that saw prices drop below $1,700 per ounce. It is currently trading at around $1,911 an ounce.

Inflation in the U.S. is still very much in the spotlight as the central bank has been keeping the financial system flushed with cash. The Federal Reserve has since last year kept interest rates low and bought up Treasurys, in a bid to stimulate the Covid-hit economy and keep financial markets afloat.

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Speaking to CNBC’s “Squawk Box Asia” on Monday, the resources analyst pointed to recent U.S. inflation data that showed prices were rising as the core personal consumption expenditure index for April came in faster-than-expected on Friday. The measure is considered by central bank officials as the best gauge of inflation.

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Higher readings of inflation are set to be a “boon” for gold, a physical asset, Lennox said.

“Inflation’s coming back because we’ve seen such a significant surge in U.S. money supply,” he explained. “Whenever we’ve seen that surge in the past, it’s been accompanied — probably five of six months later — by higher inflation.”

Gold playbook

Depending on one’s investment time horizon, there are two ways to participate in the expected gold rally ahead, Lennox suggested.

“At this stage, we’d suggest that if we do see a solid surge in the gold price, then you could look for a gold ETF where you do get that one-on-one price movement — of course minus any management fee,” he said. “That does give you very good exposure.”

For those investing for the longer-term, however, Lennox said they should consider exposure to gold miners instead.

“(The miners) have the capacity to grow their production in the future and they also pay dividends, so you get a little bit back,” he said.

Dollar weakness ahead?

Meanwhile, the dollar is also expected to weaken, and could be another potential tailwind for gold — considered a safe investment asset in times of market uncertainty.

“We’ve got rising debt, we’ve got more physical money inside … the U.S. dollar pool,” Lennox said. “Those two factors in themselves would suggest that we’re going to see a weaker U.S. dollar going forward.”

Furthermore, the economies of major currencies that trade against the U.S. dollar are in some instances doing better than the U.S., he said without elaborating.

“We think there’s further (dollar weakness) to go and that’s going to be a very good tailwind for the gold price and precious metals,” said Lennox.

— CNBC’s Jeff Cox contributed to this report.

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