The traditional cause-effect relationship between inflation and gold prices may not hold true in the current economic climate. Typically, gold has been considered a haven asset and a hedge against inflation, leading to higher prices during periods of inflation. Conversely, gold has historically lost value when reports indicate lower inflation.
In recent times, the relationship between gold prices and inflation reports has become more complex. This is largely due to the Federal Reserve's aggressive monetary policy, which involves raising interest rates to combat the current inflation rate to bring it down to the Fed’s target of 2%. Therefore, if the upcoming Consumer Price Index (CPI) report, scheduled for tomorrow, shows a decline in inflation as predicted, it would generate bullish market sentiment for gold. In such a scenario, a decrease in inflation would alleviate pressure on the Federal Reserve to pursue more aggressive rate hikes.
The current forecast suggests that tomorrow's report will reveal the lowest level of inflation in the United States in over two years. This outcome is a direct consequence of the Federal Reserve's aggressive monetary policy, which has resulted in 10 out of the last 11 Federal Open Market Committee (FOMC) meetings resulting in rate increases, taking the benchmark interest rate from near zero to between 5% and 5 ¼%.
According to an article penned by Martin Baccardax in TheStreet, “Wall Street forecasts suggest headline consumer prices rose 3.1% over the month of June, compared to the four-decade high of 9.1% recorded over the same period last year and the 4% pace reported in May. On a monthly basis, Street forecasts pegged headline CPI at 0.3%, a nudge faster than the 0.1% pace tallied in May thanks in part to higher gas prices, with core easing to 0.3% from 0.4%.”
In anticipation of tomorrow's inflation report reflecting a significant decline in both headline and core inflation, we have observed gains in gold prices, accompanied by declines in yields and the value of the dollar. As of 4:15 PM EDT, gold futures basis the most active August contract have risen by $6.30 or 0.33%, settling at $1937.30. Simultaneously, the dollar has experienced a 0.29% decrease, bringing the index to 101.345.
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In other words, if we see a soft inflation report it will be positive for gold pricing. This could create momentum to move gold prices to its current level of resistance which is $1955 and based on gold’s simple 100-day moving average.
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Wishing you as always good trading,
Gary S. Wagner
