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Gold: Impact From CPI Won’t Last Given Long Window To U.S. Rate Hike

By Barani Krishnan/Investing.comCommoditiesAug 10, 2022 04:28AM ET
www.investing.com/analysis/gold-impact-from-cpi-wont-last-given-long-window-to-us-rate-hike-200628303
Gold: Impact From CPI Won’t Last Given Long Window To U.S. Rate Hike
By Barani Krishnan/Investing.com   |  Aug 10, 2022 04:28AM ET
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  • Seven weeks until next US rate hike
  • Stronger-than-forecast July CPI could hurt gold
  • But the damage likely won’t last given bullion’s recent momentum

Is gold’s inflation-play back?

Before we try and answer that, how about a more elementary question: Could the yellow metal survive the U.S. Consumer Price Index report for July, especially if it delivers another searing number on inflation that will serve as an indictment of the Federal Reserve’s months-long effort in containing price growth?

The answer seems to be 'yes' beyond the immediate term, and we’ll explain why.

The bottom line is that a CPI report that isn’t too damaging to gold will likely help longs in the game continue advancing in the $1,800 region.

Spot Gold Daily
Spot Gold Daily

Charts by SKCharting.com with data powered by Investing.com

Bullion aficionados will argue that hedging against inflation is an inherent part of the daily flows into the futures, exchange-traded funds, and other vehicles used by investors to access the metal. Gold, they’ll add, has never really diverged from its relationship with inflation; their argument is that only those who don’t understand it will utter the contrary.

Unfortunately, though, gold’s behavior over the past two years hasn’t really lived up to its billing as the ultimate safe haven.

Since hitting record highs of about $2,100 in August 2020, gold has often disappointed its backers more than it has delighted them. Case in point: its descent into $1,600 territory on July 14—the first time since August 2021—after the June CPI report showed annual inflation at a new four-decade high of 9.1%.

That CPI report itself was followed by an epic US jobs report for July on August 5 that showed a creation of 528,000 jobs, more than twice the 250,000 forecast by economists.

The reason gold gets socked after each blockbuster CPI or jobs report is because of the interest rate expectations that they bring and the rally those expectations cause in the dollar and Treasury yields—the two contra trades to gold.

The Fed, as every gold trader knows, wants to bring inflation back to its long-cherished target of 2% a year; or 4.5 times less than what it was for June.

After four increases since March that have brought rates from nearly zero to as high as 2.5%, the Fed is nonplussed that inflation refuses to budge from four-decade highs.

After the August 5 release of the US jobs report, Investing.com’s Fed Rate Monitor Tool initially showed a 67% chance of the central bank implementing a 75 basis point rate hike for September 21—the date for its next rate adjustment.

By August 9, there was only a probability of 52% for a 75-basis point hike, with traders assigning a higher 48% chance for a 50-basis point increase.

Also, unlike previous months, the Fed will have this time two back-to-back US monthly employment reports to peruse before its next rate decision. The next nonfarm payroll report, for August, will be on September 2—some 19 days before the rate decision. There will also be another CPI report, for August, due on September 13. On top of that, the Fed will have its Jackson Hole symposium in Wyoming from August 25-27 to debate at length on what to do with inflation and the economy.

What all these simply mean is that the central bank will have ample time to decide on its next rate hike. The imminent July CPI report will only be one of the many data points telegraphed by the Fed over the next six to seven weeks as it determines what to do with an economy that has slipped into the technical definition of a recession from two straight quarters of negative gross domestic product growth.

This is why we answered 'yes' earlier to the question on whether gold will likely survive a stinging July CPI number.

Aside from the CPI report, the producer price index figures for July will be released on Thursday, along with the weekly report on initial jobless claims, while the University of Michigan consumer sentiment index will be published on Friday. These smaller data points could also help navigate the Fed in its decision-making on rates.

While the mere threat of rate hikes once sent gold bulls scurrying for cover, recent weeks have shown the yellow metal holding its own against such concerns.

In fact, the game may have arguably changed for gold longs. Strong inflation reports, over time, will likely be better for them as these will truly give the metal a chance to prove its worth as a hedge.

This could explain why gold prices have risen in the last two days prior to the CPI report. On Tuesday, the benchmark gold futures contract on New York’s COMEX, December, settled at $1,812.30, up $7.10, or 0.4%. On Monday, it rose $14, or 0.8%. While it was weaker in Wednesday’s Asian trade, December gold held above the key $1,800 level.

Analysts said while the Fed would be inclined to keep raising rates until it gets to that inflation target, longs in gold are also betting on more safe-haven flows concurrently into the yellow metal for those wanting to hedge against economic uncertainties.

Said Ed Moya, analyst at online trading platform OANDA:

“Gold is getting a boost … from both safe-haven flows as stocks weaken and as the dollar softens. Geopolitical risks remain elevated and that could keep gold supported above $1,800 going into year end.”

Spot Gold Weekly
Spot Gold Weekly

The short-term impact from an outsized CPI report will likely be damaging to gold, but the yellow metal could also rebound fairly quickly, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

Spot Gold Monthly
Spot Gold Monthly

Adds Dixit, who uses the spot price of bullion for his analysis:

“If the CPI inflation numbers come in above consensus, gold will likely drop to $1,775 and $1,765. Breaking below $1,754 will change current momentum to bearish and open the gates for a retest of the $1,730-$1,710 region.”

“But if Gold doesn't break below $1,785 and gathers enough momentum to make a sustained break above $1,802 we can expect a break above the previous monthly high of $1,815. The next targets will be $1,828 and $1,842.”

Dixit said major resistance for the current uptrend was at $1,878.

“The short-term momentum is controlled by the 23.6% Fibonacci level of $1,772 and the 38.2% Fibonacci level of $1,830. Buyers and sellers are sitting on fence line at $1,798 to $1,802.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Gold: Impact From CPI Won’t Last Given Long Window To U.S. Rate Hike
 

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Gold: Impact From CPI Won’t Last Given Long Window To U.S. Rate Hike

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Comments (10)
Vidyasagar Deshpande
Vidyasagar Deshpande Aug 11, 2022 12:16PM ET
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Fed will increase rates to 3.5-4% by dec 22 fir sureMarket will go down once reconciliation euphoria gets over
Mohideen kunji Mohamed rafi
Mohideen kunji Mohamed rafi Aug 11, 2022 8:47AM ET
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Any advice buying level for short time ??
SunilKumar Dixit
SunilKumarDixit Aug 11, 2022 8:47AM ET
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Mohideen. Gold short and mid term Outlook is ripe for buying the dips around value areas when prices test support levels. In present momentum, buying around 1783 and 1772 may be considered as long as Gold sustains above 1754 on Daily basis. We see 1815 as another important confirmation for boost in uptrend and we expect Gold to test 1828 & 1840 with a sustainable break above 1815
Mohideen kunji Mohamed rafi
Mohideen kunji Mohamed rafi Aug 11, 2022 8:46AM ET
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Wise advice appricated
Mohd Izhar Muslim
Mohd Izhar Muslim Aug 10, 2022 2:31PM ET
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Thank you for sharing the article 💯
Barani Krishnan
Barani Krishnan Aug 10, 2022 2:31PM ET
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You're most welcome, Mohd Izhar. And thanks for being a reader.
TWIN ZONE
TWIN ZONE Aug 10, 2022 1:22PM ET
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What are your views in hindsight sir?
Barani Krishnan
Barani Krishnan Aug 10, 2022 1:22PM ET
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Hindsight? Not sure what you mean. But if I get it, then I was expecting a US gasoline pump price of around $3.80 by the start of fall. I think we might get there.
Barani Krishnan
Barani Krishnan Aug 10, 2022 1:22PM ET
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As for gold, we should be bobbing at around $1,800 to under $2,000 from here.
Trumpster Rocks
Trumpster Rocks Aug 10, 2022 11:53AM ET
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Finally an honest write up that's not leaning left. Good Job!
Barani Krishnan
Barani Krishnan Aug 10, 2022 11:53AM ET
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Thanks :)
Ryan Swartzwelder
Ryan Swartzwelder Aug 10, 2022 8:56AM ET
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Do you think gold will be taking a major price drop? Due to the huge cache they found in africa.
Barani Krishnan
Barani Krishnan Aug 10, 2022 8:56AM ET
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I think that's been discounted for now. Whatever the case, that cache has to come to market first.
SunilKumar Dixit
SunilKumarDixit Aug 10, 2022 8:56AM ET
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Ryan. Huge cache discovered In Africa hasn't caused major shift in Gold Outlook yet, as it is going to take fairly long for Gold ore to be mined, refined, processed and hit the shelves.
Tom Scheuermann
Tom Scheuermann Aug 10, 2022 8:56AM ET
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frankly, I don't believe any of it and seemingly the market doesn't either for if it did gold would've obviously taken a major hit. the "find" is allegedly equal, or exceeding, all the gold that had ever been mined in the history of Earth. if it were true China would've exploited it decades ago
Barani Krishnan
Barani Krishnan Aug 10, 2022 8:56AM ET
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Tom Scheuermann  Totally, mate! I'm with you :)
Martin Babei
Martin Babei Aug 10, 2022 6:06AM ET
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Thanks Barani. Clear overview on gold. I personally think the is another reason for the climb in gold, other then geo politics, save haven and inflation hedge. I think smart money is beginning to diverge from the FED narrative that they can bring inflation down at all, without crashing the economy and the dollar. Previous 0,75 basispoints did nothing. And so will the next. This feeds into the 3 reasons, I know. But the big deference now is smart money is not buying into, or playing the FED narrative anymore. So another 0,75 basispoints may just be a reason for them to buy more gold, even if the dollar moves higher because this road is leading to nowhere and to make things wurst, there is a ceiling for raising interest rate, considering government dept.
Barani Krishnan
Barani Krishnan Aug 10, 2022 6:06AM ET
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Great perspective, Martin. We may just need one critical piece of evidence to conclude this: whether even the balance sheet taper, when it starts, won't help. I'm saying this because some are arguing that the full start of QT will make a difference to the Fed's game.
SunilKumar Dixit
SunilKumarDixit Aug 10, 2022 6:06AM ET
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Martin Babei. Truly said. Fed's Rate Hike is approaching that ceiling after two three hikes and the gigantic debt servicing will throw another unbeatable challenge apart from deeper recession which may not be transitory.
Ivan Radusic
Radusic Aug 10, 2022 5:21AM ET
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Barani thank you so much for this great article, as always yo do.
Barani Krishnan
Barani Krishnan Aug 10, 2022 5:21AM ET
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Truly appreciate the feedback, Radusic. It's readers like you who keep me going. Thank you.
John Cerniuk
John Cerniuk Aug 10, 2022 5:03AM ET
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gold miners are starting to look extremely under valued. i think cooling off on rates hikes and lower oil prices should be bullish
Barani Krishnan
Barani Krishnan Aug 10, 2022 5:03AM ET
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Very likely, John.
SunilKumar Dixit
SunilKumarDixit Aug 10, 2022 5:03AM ET
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Soft US CPI numbers are very likely to trigger buying on dips as rush to safety looms large.
 
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