Inflation driving momentum in gold. but Fed rate hikes remain headwinds

The gold market remains caught in a tug of war between rising interest rates and inflation; however, momentum could be shifting to the bullish side as prices end the week at the top of their range above $1,850 an ounce.

Gold prices have hovered around $1,850 an ounce for the past three weeks. After some intense selling pressure early Friday, the precious metal saw a dramatic rebound as prices bounced off support just above $1,825 an ounce.

August gold futures are looking to end the week with a 1.5% gain, last traded at $1,876.50.

According to some market analysts, disappointing economic data, including hotter-than-expected inflation, provided new bullish momentum for the precious metal. At the same time, further weakness in equity markets is improving gold's safe-haven allure.

"Gold is doing exactly what it should be," said Bob Haberkorn, senior market analyst at RJO Futures. "Investors are once again looking at gold as an inflation hedge and a safe-haven asset."

General market sentiment turned negative Friday after the U.S. Labor Department said its Consumer Price Index rose 8.6% for the year in May. Consumer prices have hit a 40-year high, driven by rising food and energy prices.

A little later Friday morning, the University of Michigan said its consumer sentiment index dropped to 50.2, its lowest level in 50-years. At the same time, consumers expect inflation to rise by 5.4% in the next 12 months.

Haberkorn said that the selloff in equities and the gold rally indicates that the market is starting to realize that there is nothing the Federal Reserve can do to tame inflation.

Although the U.S. central bank will continue to raise interest rates, they will be nowhere high enough to match inflation.

"In this environment, what you really want is gold," he said.

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that rising consumer prices are raising the risk of a policy mistake, not just from the Federal Reserve but from central banks worldwide.

Gold sees record bullish sentiment among European retail investors – Spectrum Markets

Gold still needs to deal with the Fed and rising interest rates

Although momentum currently favors gold bulls, the market still faces some challenging headwinds as the Federal Reserve is expected to raise interest rates by 50 basis points next week.

Hansen said he is neutral on gold next week as the market is trying to figure out how high interest rates will eventually go.

"Right now, investors don't know which way the market will go," he said. "I don't want to get involved with gold until we see a sustained move above $1,875."

Bart Melek, Head of Commodity Strategy at TD Securities, said that gold prices could drop back below $1,850 an ounce next week following the U.S. central bank's monetary policy meeting. He added that in the short-term rising interest rates are still negative for gold.

However, Melek added that the question remains just how committed the Federal Reserve will be to taming inflation and if they will risk pushing the economy into a recession.

Long-term, Melek said that he remains bullish on gold as he expects the Federal Reserve "to flake out on interest rate hikes.

"The Federal Reserve is not prepared to do what it takes to get inflation under control," he said.
 

Watch consumption data next week

While markets are paying close attention to inflation, analysts and economists also say that investors need to keep an eye on consumption numbers with U.S. retail sales in focus next week.

Hansen said that if inflation continues to take its toll on the consumer, weaker consumption will lead to lower economic growth.

Economists note that a strong labor market and elevated savings have helped support consumers so far this year; however, savings have dwindled due to waning purchasing power.

"The squeeze on real incomes from higher prices will weigh particularly hard on goods spending ahead given the excesses in that area of the economy relative to services. And with higher interest rates limiting demand for big-ticket items and housing-related spending, total consumption growth is set to slow in the second half of the year," said economists at CIBC.
 

Next week's data

Tuesday: U.S. PPI

Wednesday: U.S. Retail Sales, Empire State Manufacturing Survey, FOMC monetary policy meeting

Thursday: Swiss National Bank monetary policy meeting, Bank of England monetary policy meeting, Philly Fed Survey, weekly jobless claims, U.S. housing starts Bank of Japan monetary policy meeting

Friday: Federal Reserve Chair Jerome Powell gives welcoming remarks at conference on the International Roles of the US Dollar

By Neils Christensen

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

CPI report confirms what Americans already know; Inflation continues to rise

Today the U.S. Bureau of Labor Statistics released the CPI (Consumer Price Index) for May. The report confirmed what North Americans have known and been entrenched in; the fact that inflation continues to spiral out of control, and is now at the highest point in 41 years. The CPI rose 0.3% in April. This takes last month’s inflationary pressures to the highest year-over-year (YoY) change in 41 years. This means If you were born at or after 1982 you are witnessing and living through the highest monthly uptick in inflation (YoY) ever.

Just The Facts

The CPI increased by 1% month over month (MoM)

Inflationary pressures rose in both the CPI and the core CPI

The core CPI rose 0.6% taking the YoY inflation level to 6%

The CPI spiraled to 8.6% YoY the largest yearly gain since December 1981

The largest increases in the CPI were food, energy, and housing costs

Forecasts varied by economists polled by Bloomberg, Reuters, and The Wall Street Journal. Economists polled by the Wall Street Journal predicted that the CPI would come in at 8.3% increasing by 0.7% MoM. Economists polled by Reuters also predicted that the CPI would rise 0.7% MoM. Economists polled by Bloomberg News said that the CPI would reveal that inflation is tracking at about the same monthly pace and that the probability for a higher level of inflation YoY was high.

Economists from all three poles got it wrong. Economists polled by Bloomberg, Reuters, and The Wall Street Journal all underestimated the MoM rise in inflationary pressures.

The largest contributor to this major uptick in inflationary pressures is the cost of energy which rose 34.6%. However, almost all components recorded record-breaking increases including food costs which rose an average of 10.1%. The cost of housing increased by 5.5%, and commodities as a whole increased by 8.5% all on a year-over-year basis.

What this means for consumers; more hardship ahead

Considering that average hourly earnings fell by 3% in the last year and costs of the goods and services they need have risen dramatically equates to more hardship for low and middle-class Americans. This also means that newly acquired debt (mortgages, new car loans, etc.) will not only be harder to qualify for, and they will be more expensive to service. Existing balances will also be dramatically impacted. Variable-rate credit cards will increase making existing balances more expensive to service.

How the current CPI will affect the forward guidance of the Federal Reserve

The Federal Reserve will hold its June FOMC meeting on Tuesday of next week and conclude on Wednesday. While a minority of economists are anticipating a rate hike of 75 basis points (3/4%) the likelihood that the Fed will get more aggressive on the size of monthly rate hikes is extremely minute. The most likely forward guidance of the Federal Reserve is to continue to raise rates by 50 basis points after the remaining FOMC meetings this year. The question becomes how many 50 basis point rate hikes will the Fed implement, and what will the Fed’s funds rate be by the end of the year?

A roller coaster ride for gold traders

Traders and investors experienced another wild trading session which can be best characterized by its extreme volatility. The chart above is a 10-minute candlestick chart of gold futures. At 8:30 AM EDT gold futures opened at $1850, and by 8:40 AM EDT traded to the low of the day at $1826.50. As of 4:40 PM, EDT gold futures are up to $22.70 or 1.23% and fixed at $1875.60.

As we have been addressing for many months now our belief is been that inflationary pressures have not peaked and in fact will continue to rise as long as the underlying cause continues to be persistent. We have been highly vocal in our opinion that the current forward guidance of the Federal Reserve will not move inflationary pressures lower. At best higher interest rates will contract the economy to such an extent that it will result in a recession. At worst that their actions will be detrimental fueling inflationary pressures higher. The current level of inflation and the current forward guidance of the Federal Reserve will be highly supportive of gold prices moving them higher over the course of the next two years.
 

By Gary Wagner

Contributing to kitco.com

Time to buy Gold and Silver on the dips

Tim Moseley

Gold, silver down as USDX rallies, U.S. Treasury yields remain elevated

Gold and silver prices are lower in midday U.S. trading Thursday, pressured by a rally in the U.S. dollar index on this day and by U.S. Treasury yields that remain elevated. Gold down-ticked a bit more following the European Central Bank regular monetary policy meeting, at which the central bank kept its policy unchanged but said it will likely raise interest rates starting in July. August gold futures were last down $8.50 at $1,848.10. July Comex silver futures were last down $0.404 at $21.685 an ounce.

Global stock markets were mostly weaker overnight. U.S. stock indexes are weaker at midday. Trading in the stock indexes has been choppy recently, but the bulls still don’t have the power to start near-term price uptrends.

The other major data point of the week is Friday morning’s U.S. consumer price index report for May. The CPI is expected to be up 8.2%, year-on-year, after a rise of 8.3% in April. Many look for this report to run extra hot, which would be a markets-mover Friday morning.

Gold market is waiting for next week's Fed meeting – StoneX's O'Connell

The key outside markets today see Nymex crude oil prices slightly lower and trading around $121.50 a barrel. The U.S. dollar index is weaker in early trading. The yield on the 10-year U.S. Treasury note is fetching 3.2%.

Technically, August gold futures bears have the overall near-term technical advantage but the bulls are still working on a fledgling price uptrend. However, they need to show more power soon to keep it alive. Bulls' next upside price objective is to produce a close above solid resistance at $1,900.00. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,800.00. First resistance is seen at this week’s high of $1,862.40 and then at the June high of $1,878.60. First support is seen at this week’s low of $1,838.50 and then at the June low of $1,830.20. Wyckoff's Market Rating: 4.0.

July silver futures bears have the overall near-term technical advantage. Silver bulls' next upside price objective is closing prices above solid technical resistance at $23.00 an ounce. The next downside price objective for the bears is closing prices below solid support at $21.00. First resistance is seen at today’s high of $22.165 and then at this week’s high of $22.565. Next support is seen at today’s low of $21.535 and then at the June low of $21.41. Wyckoff's Market Rating: 3.0.

July N.Y. copper closed down 865 points at 436.86 cents today. Prices closed nearer the session low today. The copper bulls have the slight overall near-term technical advantage. A three-week-old price uptrend is in place on the daily bar chart. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at last week’s high of 457.70 cents. The next downside price objective for the bears is closing prices below solid technical support at 420.00 cents. First resistance is seen at today’s high of 445.15 cents and then at this week’s high of 447.20 cents. First support is seen at 435.00 cents and then at 430.00 cents. Wyckoff's Market Rating: 5.5.

By Jim Wyckoff

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley

Gold market is waiting for next week's Fed meeting – StoneX's O'Connell

The gold market has been trapped in a three-week holding pattern and could continue to consolidate until next week's Federal Reserve monetary policy meeting, according to one market analyst.

The CME FedWatch Tool shows that markets see a more than 90% chance that the Federal Reserve will raise interest rates by another 50-basis points. The central bank has signaled that it could raise interest rates by 50-basis points at the next two meetings. Meanwhile, markets are pricing in three consecutive aggressive moves.

However, in her latest weekly analysis, Rhona O'Connell, Head of Market Analysis for EMEA and Asia at StoneX, said that gold investors should look past any potential knee-jerk reactions following next week's announcement and focus on the bigger picture.

Gold prices continue to trade around the $1,850 level. August gold futures last traded at $1,856.70 an ounce, up 0.25% on the day.

Even with the Federal Reserve's aggressive monetary policy stance, markets see interest rates hitting a high of 3.50% by the end of the year. However, inflation pressures will remain elevated.

"At present, U.S. two-year yields are 2.7%, while headline inflation is 8.2%, although there are still some dislocations to drop out of the year-on-year calculations. So, while the headlines about rate hikes are likely to generate knee-jerk reactions in the markets, the longer-term view should revolve around persistent negative real rates," said O'Connell.

Although markets continue to price in significant rate hikes during the summer, O'Connell noted that there is still a lot of uncertainty regarding how the central bank's plan to reduce its balance sheet will fit with current monetary policies.

Gold price remains chained to $1,850 as OECD lowers growth forecasts

This month Federal Reserve started to run down its balance by $47.5 billion. By September, it will begin reducing its balance sheet by $95 billion.

"Tightening gives a natural buoyancy to bond yields, and it is certainly possible that this could allow the Fed to be less aggressive in its interest rate hiking than the bond markets have been discounting," said O'Connell. "So, the essential financial parameters remain supportive for gold, but the professional markets are still not committing in any size."

Ahead of the Federal Reserve's decision is Friday's Consumer Price Index report. Economists are expecting the data to show that inflation pressures have peaked. The question remains, though, as to how fast it will take for prices to cool down.

According to consensus forecasts, economists are expecting annual headline inflation to rise 8.2%, down slightly from the March peak at 8.5%. Annual core inflation, which strips out food and energy prices, is expected to increase 5.9%, down from 6.2% in April.

By Neils Christensen

For Kitco News

Time to buy Gold and Silver on the dips

Tim Moseley