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What does the US inflation tells us about gold price?

Commentaries & Views

Gold prices have been trading below the critical level of $2,000 for some time, and traders are wondering if the price is going to move higher and, more importantly, what will be the factor that will move the price higher.


Gold prices are highly sensitive to a number of factors, which traders should pay close attention to. Firstly, gold is highly known as a risk-off asset, which means that usually when traders favour riskier assets such as stocks, they are more than likely to favour less investing in gold. On the flip side, when there is uncertainty in the market, which could be due to a number of factors such as geopolitical tensions, an economic slowdown, or a fear of a recession taking place, traders tend to put their money in gold.

A factor that has a highly strong correlation with the gold price is the movement in the dollar index. Most of the time, the relationship between the gold price and the dollar index is negative, meaning that when the gold price moves higher, the dollar index moves lower, and vice versa. The dollar index is highly sensitive to the Fed’s monetary policy. When the Fed, which is basically the central bank in the US, expands its monetary policy, also known as adopting a dovish stance, the dollar index mostly moves lower, which means that it creates more favourable terms for the gold price to move higher. We saw a massive move in the gold price when the Fed expanded its balance sheet and started cutting the interest rate during the financial crisis and COVID period. The dollar index moves sharply higher when the Fed begins to tighten its monetary policy, which usually means it begins to increase interest rates and also stops or slows down the process of asset purchase programmes—something it puts in place to ease off the crisis impact on the US economy. With strength coming into the dollar index, the gold price usually moves lower.

Currently, the Fed has a hawkish monetary policy, which means it has been increasing interest rates at a record pace over the past few quarters to tame inflation. . The gold price chart here shows the price moving away from its all-time high. But now, the inflation data has started to ease off which means something is about to happen with the gold price.

What to Make of US CPI Data

Today, we received a fresh reading of the US CPI reading, and in my opinion, this reading has laid the foundation for the Fed’s new future monetary policy, and we are likely to see a glimpse of this in the Fed’s policy meeting tomorrow. Today’s inflation data has shown that inflation has printed a reading that was lower than expectations, and more importantly, it is moving in the direction that the Fed always wanted. The US CPI m/m came in at 0.1% when expectations were for 0.2%, and the CPI y/y came in at 4.0% against the forecast of 4.1%.

 Basically, both of these numbers show that the Fed should take it easy in terms of their interest rate hike cycle and take the summer off.

 What About the Gold Price?

With the fact that the inflation data has eased off, I think it is likely that we are going to see weakness heading for the dollar index. This means that the gold price is likely to see a serious upside. Now, how big the price could be in the coming days depends on the following: Firstly, we do need to see the Fed pausing the interest rate cycle and, more importantly, sitting on its hands during the summer with no interest rate hikes. Secondly, the Fed members, especially the Fed Chairman, should continue to send a more clear message that monetary policy is working effectively and there is no immediate need for an interest rate hike unless the data suggests otherwise. Thirdly, the inflation data over the coming months should also show that inflation is losing more steam and moving closer to the Fed's realistic target of inflation. Fourthly, oil prices continue to trade below the $80 mark and are more favourable below the $70 handle.

With these factors in play, the gold price will not only be able to easily clear the resistance level of 2020 (shown on the chart below), but there will be a greater chance of the price crossing above the all-time high.

Source: Avatrade

Traders should also keep in mind one important factor: with the Fed taking a back seat on the monetary policy side, there are stronger chances the equity markets will pick up more steam, and riskier assets will come in more demand, which may take some shine away from the gold price.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.