U.S. Economy’s Signs Of Strength Continue To Weigh On Gold

Last week’s US consumer and inflation data was broadly in line with market expectations. Following surges in both income and spending in January, the consensus was for declines in February.
 
The US core PCE price index came in just 0.1% higher month-over-month, as expected, while the year-over-year reading at 1.4% was just slightly lower than the market’s 1.5% estimate. Personal spending dropped by 1%, slightly higher than analyst predictions of a 0.8% drop, and personal income was down by 7.1%, beating market expectations of a 7.3% decline.
 
A revised reading of the University of Michigan’s Consumer sentiment survey revealed a US consumer that’s now highly confident of a recovery. Friday’s revised reading came in at 84.9, up from the flash reading of 83 earlier in the month. This is a sharp improvement from February’s 76.8 figure, and also bested analyst expectations at 83.6.
 
US markets have been reading the data as tentatively positive, particularly the inflation data, which had 10-year yields easing a touch off their highs and equities rebounding. 10-year yields were rejected from the 1.68 level on Friday and are now heading down to test the 20-day MA at around 1.62 as support. Below this, we have the crucial 1.588 level, the break of which will be the first lower-low since mid-March.

The S&P 500 and Dow Jones Industrial Average closed just shy of their all-time highs, while the NASDAQ 100 and Russell 2000 still have a way to go to make up the ground lost following the recent sell-off. Meanwhile, transportation, real estate and basic materials were three sectors that surged on the news.

This puts gold in something of a precarious position. Its 43% rally from last March’s depths to August’s record highs were founded on a fear of imminent inflation coupled with the uncertainty of a full reopening with coronavirus cases still rising and vaccination drives not yet near to achieving full herd immunity. With inflation readings within market expectations and Powell’s public statements about his intentions to allow it to run hot, gold as an inflation hedge is going to be a tough play to sell, especially with the reflation trade and its gyrations between growth and value providing ample sources of alpha elsewhere. The bull case for gold, in the short term at least, appears to be evaporating.

With the exception of the double-tops of November and January, the precious metal has regressed below the 20-day moving average and is now being rejected from it with every subsequent failed bounce attempt. The sell-off we saw in late February, through to early March, saw gold reaching lows last seen in June of 2020. These levels can be viewed as medium-term lines in the sand. Any break above $1964 is a higher high on the road to that all-time high around $2070, and any break below $1671 leaves gold bulls with not much in the way of support between them and the March lows. At this time, that $1671 level seems the riper of the two for the picking, and barring any unexpected threats to an orderly reopening, you can expect it to retest that level sooner rather than later.
 
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