Is Gold a Good Inflation Hedge?

  


Talking Points:

  • Gold was unable to break above its key trendline as inflation expectations rise, picking up USD momentum along the way
  • XAU/USD key levels to watch

Gold (XAU/USD) has been unable to hold bullish momentum in its attempt to cross the 1,850 line as the US Dollar saw a big jump in yesterday’s session on the back of stronger than expected inflation. Gold, which is traditionally thought of as an inflation hedge, has been highly sensitive to USD moves lately as the US currency has been moving in line with US bond yields on the back of rising inflation expectations.

In reality, we shouldn’t be surprised about strong inflation data given that the Fed has already warned it was expecting such a thing in April. But after Friday’s disappointing job figures, yesterday’s CPI reading (+4.2% YoY) screams that maybe we should be paying more attention. The Fed has been justifying rising prices with the transitory effects of the supply and demand gap during an economic recovery, but thinking ahead, as the service sector reopens, is this aggregate demand going to be more persistent?

Fed Vice Chairman Richard Clarida thinks not. He said so yesterday after the figures came out, reiterating this supply and demand mismatch post-pandemic was the main cause of the rise in prices. But he also mentioned that the reading was above his expected forecast, and so the Fed would monitor inflation expectations closely. Unfortunately, we will not be able to see confirm whether inflation is transitory until the next few months, but given the reaction in the stock market yesterday, investors are starting to doubt the Fed’s ability to manage inflationary expectations. For now, this afternoon’s PPI figures are likely to draw increased attention as they are thought to be an indication of future price rises down the supply chain. And with expectations of a rise of 5.9% YoY, May’s CPI figures could be coming in hot as well.

XAU/USD KEY LEVELS:

So what does this mean for gold prices? Well, theoretically they should be benefiting from higher inflation numbers as investors usually seek to protect their capital from inflationary pressures. But this is usually true in the long run and not so much in the short run, due to its opportunity cost. So for now expect XAU/USD to continue falling if inflation fears increase, most likely on the back of a strong US Dollar if bond yields continue to rise.

That said, there are some wider risks in financial markets right now, most notably the Indian Covid-19 variant and the ongoing conflict between Palestine and Israel, so gold could be sought out as a risk-hedge in the immediate outlook.

Looking at the daily chart, XAU/USD has played out quite nicely against my previous prediction. The rise over the last two weeks has found strong resistance at the lower of the two ascending trendlines I have been keeping an eye on for a while. For two days in a row, on Friday and Monday, gold price got rejected exactly on the trendline, weakening its bullish momentum and painting a clear indecision candlestick in Tuesday’s session, which led to yesterday’s pullback. 1,812 seems to be a good support area for now, but a close below this level is likely to bring further bearish pressure, with focus on the 1,800 level, which was a tough resistance up until last week. On the upside, a break above 1,857 is needed to consolidate further momentum, although we are likely to see further resistance at the 1,860 mark as buyers attempt to get back above the ascending trendline.

XAU/USD Daily chart

Is Gold a Good Inflation Hedge? - XAU/USD Rejected at Key Trendline, Focus on US PPI

Source: Refinitiv

Fibonacci Confluence on FX Pairs

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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