Gold outlook: another raging inflation print dims XAU/USD’s trajectory
Gold prices fell three percent last week as US inflation surprised higher; the Federal Reserve will likely have to step up its fight against prices and XAU/USD remains fundamentally biased to the downside as CPI rages.
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Gold prices aimed about three percent lower this past week as the yellow metal succumbed to the all-too-familiar fundamental backdrop that has been weighing on it since the beginning of this year. The two-year Treasury yield touched 4.5 percent, which was the first time since August 2007. The US dollar also aimed higher over the past five trading sessions.
When both Treasury yields and the US dollar move in the same direction, this can have a profound impact on anti-fiat gold prices. XAU/USD has no inherent yield for holding the asset outside of the expected future price. A bond earns you interest, certain stocks offer dividends and even trading currencies can result in a payment stream depending on the composition of interest rates, also known as a carry trade.
So, when interest rates rise, this tends to bode ill for the yellow metal, and vice versa. Compounding gold’s weakness is a stronger US dollar given that the yellow metal is largely priced around the world in the greenback. Thus, a lot of traders might have been caught off guard if they were looking for an inflation hedge. Despite the highest inflation around the world in decades, gold is down 20% from an all-time high.
Speaking of inflation, last week’s US CPI report carries with it important consequences. In September, both the headline and core rate surprised higher. This is not good for the Federal Reserve, which will likely have to step up its game to bring inflation down to target. Since October began, markets have been increasing odds of 50-basis points worth of tightening in 2023.
With that in mind, by fundamental principal, it is likely to remain a tough week ahead for gold. The US economic docket notably dies down outside of earnings season. But, we will get inflation data from countries like the UK and Canada. Eurozone CPI data is also on tap. Strong readings would continue to underscore the global tightening effort, undermining gold.
Gold fundamental drivers
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This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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