Gold price steadies on US dollar weakness ahead of US CPI

The gold price has found support ahead of crucial US CPI on Thursday. The market has expectations that the data might reveal a slight easing of the annual number, but the monthly figure is anticipated to remain firm.

According to a Bloomberg survey of economists, headline month-on-month CPI for October is forecast to be 0.6% against 0.4% for September and 7.9% for the year-on-year figure against 8.2% previously.

Month-on-month ex-food and energy CPI is forecast to show a slight easing to 0.5% against 0.6% prior, with the annual read expected to be 6.5% versus 6.6% previously.

While the current inflation read will be in focus for traders, the market’s interpretation of the implications for breakeven inflation rates could be of more significance for the yellow metal.

The breakeven inflation rate is the market-priced forward-looking inflation rate that is derived from Treasury Inflation Protected Securities, otherwise referred to as TIPS.

The real yield is the nominal yield less the breakeven inflation rate. This is the total return that can be expected from a bond accounting for the impact of price increases over the term of the bond.

As gold does not deliver a return, the real return of other so-called ‘safe haven’ assets is often seen as variable contributing to the price fluctuations of gold.

It should be noted that holding physical gold has a cost of carry. The cost of storage is the most significant component.

Looking at the 10-year Treasury note less the corresponding breakeven inflation rate, the US real yield remains near the 13-year high seen last Thursday.

Something that stands out when looking at the chart above is the recent dislocation between the real yield and the US dollar (DXY) index. The ‘bid dollar’ has weakened since Friday despite the real yield remaining at lofty levels.

At the same time, gold rallied while the USD slid lower. This triangular relationship could be something to watch going forward on two fronts.

US CPI data is coming up in a couple of days and if there is a notable deviation from forecasts, it might move the breakeven rate, which may flow into a large move on the real yield.

Secondly, if the correlation between real yields and the US dollar picks up again, that could see a reaction in XAU/USD.

Gold against US 10-year real yield and USD (DXY) index

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