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Gold On The Fence Before Key U.S. Inflation Reading 

By Investing.com (Barani Krishnan/Investing.com)Market OverviewFeb 09, 2022 04:16AM ET
www.investing.com/analysis/gold-on-the-fence-before-key-us-inflation-reading-200617575
Gold On The Fence Before Key U.S. Inflation Reading 
By Investing.com (Barani Krishnan/Investing.com)   |  Feb 09, 2022 04:16AM ET
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Oh, CPI, CPI, what will yer bring?

Thursday’s much-anticipated US Consumer Price Index for January could mean different things for different markets.

An annual reading below the forecast 7.3%—say, as low as December’s 7.0%—could pare interest rate expectations, melt down bond yields now at more than 2-year highs and calm the worst fears of stock punters, causing the S&P 500 and Dow to fly. Any reading that’s sharply higher could be another dose of kryptonite for high-valued stocks on NASDAQ, already down almost 10% on the year.

Where gold fits between the two extremes is a good guess.

Gold Daily
Gold Daily

Charts courtesy of skcharting.com

By its very asset definition, gold is an inflation hedge and should rally when price pressures get out of control, as reflected by, say, an annual CPI reading of 7.5% or above for January.

The trouble with that theory—as witnessed for months now—is that any major tick-up in inflation triggers a bond selloff that first sends the yield on the US 10-year Treasury note and the dollar rocketing. The combination of the two is usually a death knell for gold.

A week ago, I asked Gold Gets Another $1,800 Lifeline, But Will It Survive US Jobs Report?

Well, gold did survive that jobs report, which showed an addition of 467,000 positions for January versus economists’ expectations for a growth of just 125,000.

After staggering unemployment triggered by the outbreak of the coronavirus in 2020, the labor market has picked up, with the US jobless rate falling to 3.9% in December and steadying at 4.0% last month, from a record high 14.8% in April 2020. A jobless rate of 4.0% or lower is defined by the Federal Reserve as “maximum employment” in America.

The US economy itself grew 5.7% last year from a 3.5% contraction in 2020. But inflation grew even faster, with the 7% annual rise for December being the highest since 1982.

Gold Weekly
Gold Weekly

The Fed has a dual mandate of growing jobs and keeping inflation under control. So a combination of high jobs growth, high inflation and a strong economy is usually a recipe for high interest rates. And high interest rates are great for yields and the dollar, not gold.

Money markets expect the Fed to hike rates as many as five times between the March and November monthly meetings. What’s unknown is the size of the hikes. As of last week, the expectation was that the Fed will get the ball rolling with a 25-basis point increase in March.

If Thursday’s CPI growth is overwhelming, it most likely will send yields and the dollar rallying first and gold will probably plunge, reacting to those two. The yellow metal could take a day or two to reassert its standing as an inflation hedge and only then, it might rally, that too in measured moves.

Why?

Because a strong CPI could even prompt the Fed to commit to a 50-basis point hike in March. That could be real kryptonite for gold. But the prospective rate hike is five weeks away, and the more pressing question is where gold will sit between now and then.

Gold Monthly
Gold Monthly

Despite multiple calls for its doom since the start of the year due to expected US interest rate hikes, gold has managed to cling to the key bullish $1,800 levels for most of the past five weeks. Even on its break lower, it only went down as far as $1,778.80.

One reason for that is the geopolitical tensions associated with the Russia-Ukraine conflict, said some analysts.

In Tuesday’s trade on New York’s COMEX, gold futures’ most active contract, April, settled at $1827.9 an ounce.

The peak of the day, interestingly, was $1,830.15—technically a "very safe" point just below the higher resistance levels identified for the yellow metal, according to Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“Gold's recovery shows that it’s back with a vengeance and it now sits above the 50% and 61.8% Fibonacci levels of $1,817 and $1,825, respectively, of the $73 retracement measured from the $1,853-$1,780 level,” Dixit said.

“This comes as gold is supported by the 'Georgia on My Mind' theme from the buildup in Russia-Ukraine tensions that’s haunting NATO.”

The 50% and 61.8% Fibonacci levels were already considered technical positions of strength that could lead to further highs (76.4% at 1836 in this case) and retest of this year’s $1,853 top, he said.

“If the current upward momentum gains enough volume support, gold is likely to test $1,860, which is next critical resistance and even retest higher to reach $1,877,” Dixit added.

“On the flip side, failure to hold above $1,817 may trigger a pull back to $1,808-$1797 very quickly. Gold badly needs a decisive trigger for breaking through $1,830-$1,835, without which bears are going to maul the bulls again.”

As for CPI expectations, he said a marginally higher annual reading was already priced in by gold longs for January—meaning the forecast 7.3% growth might actually be good for gold.

“Substantially higher inflation with elevated Russia-Ukraine fears may trigger further a bullish move towards $1,853-$1,877, maybe not right away but eventually. Otherwise, it could be a flop show.”

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 a position in the commodities and securities he writes about.

Gold On The Fence Before Key U.S. Inflation Reading 
 

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Gold On The Fence Before Key U.S. Inflation Reading 

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Comments (13)
Shane Zhang
Shane Zhang Feb 09, 2022 12:23PM ET
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I think the main theme start way before the virus.  Look at USDJPY and Gold relationship it has been broken since 2018
me ish
me ish Feb 09, 2022 8:07AM ET
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corrections that need to be made to this article - the reason for real massive inflation is deliberate money printing by the central banks - don't think for one second the main reason is plandemic or supply chain issues/ secondly, the virus didn't cause economic lock down - the response to the virus by the world's governments - totally unecessary - caused the destruction of much of the global economy and the supply chain issues.
Barani Krishnan
Barani Krishnan Feb 09, 2022 8:07AM ET
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That's your interpretation, and doesn't qualify the call for a correction (we only correct factual errors) There is enough evidence out there to dispute your opinion. The virus didn't cause the economic lock down? I guess everyone shut down for fun then :)
AIM Investor Journal
AIM_IJ Feb 09, 2022 8:07AM ET
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Barani Krishnan  Agreed, this isn't the place to argue over semantics. Clearly the virus was the cause to the government response and was ultimately why government's took the decisions they did, right or wrong.. The first point concerning inflation and the wide reaching effects mass injection of liquidity has had on the economy since is still not very well understood nor the centre of topical debate. Lots of 'easy money' for lack of a better term went direct to people's pockets and companies at a time when supply chains were under pressure and now even more so. Where this leads next is unclear as central banks will struggle to pay interest on debt if rates go to historic averages (5-10%). So will rates plateau around 3% in the next 2-3 years, inflation slow to 2-3% and if yes what will that mean for growth (surely not positive?). In that scenario will gold and silver outperform other major asset classes (crytpos, bonds, property?)
SunilKumar Dixit
SunilKumarDixit Feb 09, 2022 8:07AM ET
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AIM. You said it right. The effects are going to be felt for a longer period of time.
Tom Tipton
Tom Tipton Feb 09, 2022 7:57AM ET
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$XYO not gold
semie Sanchez
semie Sanchez Feb 09, 2022 7:34AM ET
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Bullish for gold
SunilKumar Dixit
SunilKumarDixit Feb 09, 2022 7:34AM ET
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Semie Sanchez. Yes gold is bullish for now subject to inflation data coming ahead.
Nick Passarella
Nick Passarella Feb 09, 2022 7:30AM ET
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It feels like this economy is on fire, but not really. As if the true reason for inflation is mostly energy and commodities, and the supply chain issues over the past year or so. Well when these back orders and warehouses are bursting at the seems, we going to have big problem. Like slowing a freight train. Then Fed be like, "Now what we gonna do?"
SunilKumar Dixit
SunilKumarDixit Feb 09, 2022 7:30AM ET
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Nick. Multiple factors are working together than any one specifically.
Kochar Bipin
Kochar Bipin Feb 09, 2022 7:29AM ET
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Gold (and silver) should be viewed more as a proxy for metals and energy -
Otim Simon Tyre
Otim Simon Tyre Feb 09, 2022 7:27AM ET
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let wait and see what the market will bring
Jack Peterson
Jack Peterson Feb 09, 2022 7:22AM ET
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Can someone explain how stocks, real estate, commodities, basically all assest classes continue to stay eleveted beyond reason? Obviously the Fed and Central Banks are proppung it all up, but this insanity can’t go on forever? Charts and prognosticators seem so meaningless….
Jack Drummond
Jack Drummond Feb 09, 2022 7:22AM ET
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Hey Jack- it's just stupidity meets greed. We're, especially in stocks and cryptos, on the biggest bubble in history, hands down. Short term oil prices, that's the guiding light for the greediest of the greedy. I'm in for physical pm's.
Jack Peterson
Jack Peterson Feb 09, 2022 7:22AM ET
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Jack Drummond physical pms?
SunilKumar Dixit
SunilKumarDixit Feb 09, 2022 7:22AM ET
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He means physical precious metals.
MO Zapata
MO Zapata Feb 09, 2022 7:19AM ET
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Can we settle this already? GOLD IS NOT AN INFLAITON hedge. Jf you want an inflaiton hedge buy copper. Gold is an asset that moves opposite to real interest rates because it is a STORE OF WEALTH, not the same thing as an inflation hedge. If you can store your wealth at more attractive and rising real yields you move out of gold to the dollar or other assets. If real yeilds are falling you move to gold.
Tom Sc
Tom Sc Feb 09, 2022 7:19AM ET
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that's factually wrong though, gold is obviously an inflation hedge but it works over many years, overshoots and undershoots.
Tom Tipton
Tom Tipton Feb 09, 2022 7:19AM ET
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$XYO is an inflation hedge
Tom Tipton
Tom Tipton Feb 09, 2022 7:19AM ET
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Just look at the coin with us app…it is a pre distribution of wealth which will equate to diminishing the wealth inequality gap
Jack Drummond
Jack Drummond Feb 09, 2022 7:19AM ET
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Ok, let's get this right, then. Gold is a hedge against inflation AND  deflation. It IS a storehouse of wealth. Physical gold, mind you- none of this paper (tiger) gold trading.
SunilKumar Dixit
SunilKumarDixit Feb 09, 2022 7:19AM ET
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Tom Tipton. Now this is a truth in utmost approximation.
Tom Tipton
Tom Tipton Feb 09, 2022 7:17AM ET
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Buy $XYO not gold, it is the future of wealth distribution rewarded from anonymous geospatial data
 
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