Gold has fallen to an area of $ 1,780 USD as real returns plateau ahead of key US inflation data.
The spot price of gold continues to trade moderately in the $ 1,780 area, as real returns remain flat this week. Markets are on hold ahead of Friday’s US consumer price inflation report.
The movements in the spot prices of gold (XAU / USD) have been moderate so far this Tuesday and have continued to operate in the ranges of $ 1775 to $ 1785 USD this week. The general mood of the market is risky for the second day in a row, risk assets (stocks, Petroleum) which is heavily dependent on Monday’s earnings and this, for the most part, weighs on safe-haven assets (yen, bonds). Fears related to the Omicron variant have eased in recent days as new evidence has emerged in South Africa hinting at the variant’s comparative softness compared to previous Covid-19 variants. Traders also cite the easing of the PBoC this week and indications from the Chinese authorities that they will step in to ensure healthy growth in 2022 as positive for risk appetite.
So far, gold has been largely immune to the broad recovery in risk appetite this week, although it is widely viewed as a safe-haven asset that should depreciate in such an environment. This is likely because real US returns, with which spot gold is closely correlated, have remained subdued this week, despite a sharp rise in nominal returns. For reference, the 10-year TIPS yield changed little during the week, just below -1.0%, while the 5-year TIPS yield is also fairly stable and is trading in the -1 zone, fifty%.
Gold is negatively correlated with real US returns, which market participants use as an indicator of opportunity cost. As real returns rise, the opportunity cost of holding unproductive gold rises with it, undermining demand for the precious metal. Real yields, gold and currency markets will examine this week’s data on consumer price inflation (CPI) in the United States for signs of possible policy changes that the Fed may announce the Wednesday following the FOMC meeting.
Right now, recent aggressive rhetoric from Fed Chairman Jerome Powell and other FOMC members has markets expecting the bank to announce an acceleration of its quantitative easing program this month. A new rise in the CPI should confirm this. But despite high inflation, bond markets are still not convinced that the Fed’s plans to tighten monetary policy are enough to push real yields back into positive territory. If that starts to change and real returns rise, gold could revert to a test of recent lows in the $ 1760 region.
By Joel Frank, FXStreet
Joel Frank graduated from the University of Birmingham with a BA in Economics and has worked as a full-time financial markets analyst since 2018, specializing in covering the impact of global economic developments on financial asset classes such as currencies, stocks, bonds, and commodities. Joel is also very interested in technical analysis.
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