Gold Hits 5-Month Highs as U.S. Inflation Takes Center Stage

© Reuters.

By Barani Krishnan

Investing.com - The gold bugs’ vision may be coming true.

After months of frustration about the hapless state of the gold market versus the soaring real price for goods and services in the United States, those long bullion achieved redemption as the yellow metal hit a five-month high above $1,870 an ounce on Wednesday.

U.S. gold futures’ most active contract, December, was up $25.45, or 1.4%, at $1,856.25 an ounce after peaking at $1,870.35 — its highest since June 15.

The rally came as the Labor Department reported earlier in the day that the U.S. Consumer Price Index, which represents a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% for the 12 months through October.

It was the fastest growth of the CPI since November 1990, an acceleration driven mostly by pump prices of fuel running at seven-year highs.

Gold has always been touted as an inflation hedge. But it hasn’t been able to live up to that billing over the past year as incessant speculation that the Federal Reserve will be forced in a faster-than-expected rate hike had sent Treasury yields and the dollar rallying at bullion’s expense.

That trend abated over the past week after Fed Chair Jerome Powell assured for the umpteenth time that the central bank will be patient with any rate hike that will only come after the middle of 2022 and most likely toward the end of the year.

Aside from Wednesday’s burst higher, gold prices have been climbing steadily for five days in a row, achieving their longest positive streak since the first week of July when the market remained in the green for a seven-day stretch.

More surprising was gold’s unyielding upward trajectory despite the yields on the U.S. 10-Year Treasury note — a key indicator of real interest rates that routinely depresses bullion whenever it rallies — rising almost 6% on the day. The Dollar Index, measured against a basket of six major currencies, was also up 0.8% on the day.

Since its last close in the red on Nov 3, December gold has gained more than $90, or 5%.

“Gold people all around me feeling this hot hot hot inflation report,” Ed Moya, analyst at online trading platform OANDA, said, quoting from the ‘Feeling Hot Hot Hot’ hit song by The Merrymen.

“Inflation hitting a 30-year high was music to gold traders’ ears. The way the gold trade is unfolding is looking mostly bullish. Gold burst through the $1840 level and now faces tentative resistance at the $1900 level. Gold momentum should remain in place if real yields continue to decline.”