Appetite for the valuable commodity has waned, driven by uncertainty about the Omicron variant and Federal Reserve policies. In addition, the rise in Treasury yields supported the dollar index (DXY), putting pressure on the price of gold and causing gold to decline modestly on Monday, according to market analyst Myra P. Saefong.
“If there is a deterioration in the US CPI, we expect fireworks”
GoldCore’s director of gold services, Stephen Flood, said on Friday that gold’s bullish action “hardened” as risk aversion cooled and the U.S. dollar caught a bid on Monday. Stephen Flood made the following assessment:
All eyes are on Friday’s US CPI release to gauge how inflation is trending. If there is a disruption, we expect fireworks.
The Fed is caught between real risk to confuse markets with higher rates to ease inflation pressures or scare stock markets. If interest rates rise, gold could suffer in the short term.
Jeb Handwerger: Gold price should be viewed as a barometer
Higher rates increase the opportunity cost of holding the precious metal, making gold less attractive to investors. Gold finished last week safe as a weaker-than-expected jobs report was seen as unlikely to derail the Fed’s plan to cut monthly, market-backed Treasury and mortgage-backed purchases. However, expectations for higher interest rates weighed heavily on the gold price.
Jeb Handwerger, editor of the newsletter service Gold Stock Trades, says gold has been in consolidation for months since Treasury Secretary Janet Yellen and Fed Chair Jerome Powell indicated that the Federal Reserve may begin to cut and increase interest rates. Jeb Handwerger interprets Jerome Powell’s abandonment of the word “temporary inflation” as follows:
Jerome Powell stopped short of saying there was no inflation, then admitted that inflation was not temporary, and now reluctantly admitted it was hyperinflation. Now the question is, will they always be able to raise interest rates to control inflation before the bubble of everything collapses and keeps gold from rising even higher? They’ve managed so far.
“History teaches us to be cautious,” says Jeb Handwerger, noting that once inflation drops, it is difficult to reverse the effect so quickly and easily, warning “Watch gold as a barometer.”
“$1,725 for bulls remains a line in the sand”
Meanwhile, investors are waiting for consumer price index data to be released on Friday. Analysts at Sevens Report Research say that if we see inflation expectations not stabilizing but instead continuing to decline, gold will be happy about it, noting the following level for the bulls:
Conversely, a rebound in inflation will support gold. But the September low of $1,725 remains a line in the sand for the bulls.
Friday’s U.S. Consumer Price Index Report could be crucial in measuring the Fed’s next move. How much of a hawk the Fed will be depends on how the Omicron variant affects inflation expectations, says IG Markets Analyst Kyle Rodda:
The gold price is bearish in anticipation of tighter policy and if the CPI is hotter than expected, this will only lead to more aggressive Fed pricing. Real rates are still negative, so investors can diversify their portfolios to support gold, a traditional store of value, rather than bonds.