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Gold trims early losses as inflation accelerates, Treasury yields advance

price of gold

The price of spot gold is trimming its early losses during this morning’s commodity trading action as the annualized inflation rate in the United States rose above the market’s forecasts.

Before the data came out, the price of gold was down 0.65% at $1,876 per troy ounce but it quickly bounced to $1,885 per ounce after the US Bureau of Labor Statistics released its report on inflation covering the month of May, with the annualized consumer price index (CPI) advancing 5% – 30 basis points above economists’ forecasts for the month.

This has been the strongest spike in inflation rates since August 2008 while this is the second month in which analysts’ inflation estimates have been shattered as prices appear to be spinning out of control.

According to the report, core inflation, which excludes certain items like food and energy, advanced 3.8% or 30 basis points above the markets’ estimates, while the monthly headline CPI rose 0.8% – also 30 basis points above estimates.

Gold’s performance is almost flat for the year as the price of the precious metal has climbed from its March lows aided by well-founded concerns that inflation in the United States could be spinning out of control.

For centuries, gold has been viewed as a suitable hedge against the erosion in the US dollar’s purchasing power while cryptocurrencies, an asset class recently touted as a potential substitute for the precious metal, have been performing poorly in the past few weeks – a situation that has possibly accelerated the amount of inflows toward the most traditional alternative of the two.

Since May started, the top two exchange-traded funds (ETF) offering exposure to gold have attracted more than $1.6 billion in net inflows after months of outflows caused by a market-wide risk-on attitude prompted by the discovery of effective vaccines against the COVID-19 virus.

This turn in the tide for the precious metal can either be transitory if this latest rise in prices fades in the following months as the Federal Reserve expects or it could be just the beginning of a steep climb in the price of the yellow metal if the CPI starts to leap toward levels unseen in decades.

Meanwhile, the markets will probably weigh the possibility that the US central bank could start to seriously consider tapering its $120 billion asset purchase program as a plausible measure to slow down inflationary pressures. Such a scenario could result in higher volatility for equities as well.

What’s next for gold?

spot gold
Spot gold (XAUUSD) price chart -1-day candles with multiple indicators – Source: TradingView

Our outlook for gold remains bullish on the back of this higher inflation narrative while the price of the precious metal is tagging a key trend line support for the fourth time. The candlestick formation seen today is showing a strong bounce off this support that could be signaling that the price of the yellow metal is ready for another leap toward a near-term target of $1,965 per troy ounce.

The backdrop remains favorable for gold as long as the Federal Reserve’s policy remains ultra-accommodative while any modifications to the central bank’s asset purchase program could either reverse the current uptrend or could end up driving more interest toward gold depending on the market’s perception about how effective such a measure would be to reduce inflationary pressures.

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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and have also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.