Gold dips despite softening signs of inflation

Gold has struggled to keep up its recent bullish momentum despite inflation data supporting the view that the Fed’s rate hikes are likely to slow. Perhaps a bit of basing and consolidation is needed for the metal to gear up for a clean breakout above $1800.

After Wednesday’s softer CPI data, today’s weaker-than-expected PPI data added to the belief that inflation has peaked. As a result, we saw US stocks initially expand their gains to three-month highs, before easing back. Investors are betting that softening inflation will allow the Fed to hike interest rates less aggressively. However, we also saw bond yields rise with the 10-year breaking Wednesday’s high of 2.816%, with yields in Europe also rising. This kept a lid on gold and silver, although the dollar did fall against most currencies – especially those risk-sensitive commodity dollars.

Gold investors will be keeping a close eye on bond yields. For as long as they don’t rise too much then we should see the metal start continue to shine as it has done over the past 3 weeks or so.

The rebound in bond yields underscores investor uncertainty about the future path of inflation and interest rates. A couple of Fed officials have already said the Fed wants to see more evidence that inflation is on a downward path. With the odds of 75 basis point hike having dropped, the Fed is careful not to push too hard against that, but at the same time leave the door open for such an aggressive hike should incoming data from now until mid-September show another upsurge in prices or if employment once again proves to be too hot.

So, while today’s softer PPI and CPI prints we have had over the past two days is a welcome relief, more evidence is needed for the market to completely rule out a hattrick of 75 basis point hikes.  Overall, sentiment remains positive, and the path of least resistance is still to the upside for precious metals for now as investors look forward to the end of aggressive rate hikes by the Fed and other central banks.

Gold needs to hold above the 50-day average now after successfully breaking out above the bearish channel. What the bulls need now is to capture $1800 on a closing basis. If and when this condition is met, gold is then likely to find follow-up technical buying interest towards the 200-day average around $1842.

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