- Gold has declined only three times in 15 sessions, one of the most bullish phases in a year
- Test to $1,900 would be contingent on December US CPI falling to 6.5% and below
- Other triggers will be dollar index under 103, Treasury yields down
Gold had only three losing days in the last 15, making it the most bullish period for the yellow metal since a year ago, before it eventually rebounded towards April’s near-record pricing.
The yellow metal may be poised for such an all-time high again, provided it moves this Thursday in the US. The Consumer Price Index, or CPI, passed its first test with the December reading.
CPI grew at 7.1% during the year to November, slowing from a four-decade high of 9.1% during the 12 months to June.
It is expected to slow even further to 6.5% during the year to December, according to a consensus of Wall Street and economists polled by the media. In line with those expectations, the Federal Reserve is eyeing a 25-bp rate hike for its policy meeting that ends on February 1, a climb down from a 50-bp hike in December and four back-to-back 75-bp rate hikes. BP increases between June and November.
While gold prices have been bubbling over the past three months in anticipation of a lower Fed pivot on rates — some $235 per ounce, or a 14% rally since November — what’s really driving the yellow metal’s flight and its nemesis into a freefall? Will send The CPI must be below 6.5% for the year beginning December 1st.
The dollar index that compares with six other major U.S. companies. The currency pits has been holding above critical 103 support despite slowdowns in two key inflation components of late: U.S. inflation as measured by non-farm payrolls. Purchasing Managers’ Index, or PMI, benchmarked to the number of jobs and the service sector.
Non-farm payrolls declined by 33,000 last month, while the services PMI was the lowest since March 2020, with a reading of 49.6 against a forecast of 55. The combined effect was a drop in the dollar index from 105 to 103.87.
Currency and precious metals strategist James Stanley said in a blog on the dollar index running on the Daily FX platform on Monday:
“USD’s reaction to PMI report….expects some element of response from the Fed; something that will make the bank more modest to move further for fear of losing how much they’ve already done.” may raise, much less the growth they have planned for the road ahead.
US Interest rates currently peak at 4.5% after the Fed added 425 basis points to rates since March.
San Francisco Fed President Mary Daly said she expects the central bank to raise interest rates above 5%. His counterpart in Atlanta, Rafael Bostic, said policymakers should aim for growth above 5% at the start of the second quarter and then remain “long-term”.
Despite an uproar from Fed policymakers, a CPI rate below 6.5% for the year through December and a dollar index at sub-103 levels could be two catalysts to send gold firmly into the $1,900 zone, according to SKCharting.com. Chief Technical Strategist Sunil Kumar Dixit said
Stanley, who blogs at Daily FX, agreed, saying:
“The next spot of support for the dollar lies slightly lower, around the 103 handle on the DXY. This is the swing-high from 2020 and is also in line with the bullish trendline drawn from the May 2021 and January 2022 swing lows.”
Stanley notes that with the dollar index testing new six-month lows, “the big question is about sustainability.”
“If the weekly bar closes above 103.45, the longer term picture may turn warm in bullish scenarios. And given the confluence around the 103.00 level, this will be a big test for the USD. The big driver for this week is the CPI release.”
Dixit points to another catalyst for gold’s gains: the U.S. The Treasury yield, the benchmark for the 10-year note, could retest a swing low at 3.40 with gold testing above $1,881.
“A further fall in the yield to 3.11 could [send] gold towards $1,900 and above,” Dixit said.
In Monday trading, the front-month contract for gold futures on the New York Mercantile Exchange hit an eight-month high of $1,886.25. It reached $1,886.40 in Tuesday’s Asian trade.
The spot price of gold, which is followed more closely than futures by some traders, hit an eight-month peak of $1,881.54 on Monday and $1,876.21 in Tuesday’s Asian trade.
“A fractional base formed at $1,868, which has opened the way for a break above $1,881 to target $1,896 and $1,900. Consolidation above $1,900 could help gold reach $1,928 and $1,942. Maybe.”
But he also warns about circuit-breakers that turn the tide in gold the other way, especially if the Treasury clock is restarted.
“If the yield turns down towards 3.90, gold may slide further towards $1,860 and $1,845. A break below $1,867 illustrates temporary weakness, leading to a decline towards $1,852 and $1,840.”