Gold Talking Points:
- Gold prices broke out to fresh four-month highs on the back of a really strong inflation print this morning.
- Given last week’s dovish FOMC and this week’s extreme read on inflation, it would appear that the fundamental backdrop is open for higher Gold prices, which matches the technical breakout that showed up this morning. The key now is whether the Fed begins to adapt away from the ‘transitory’ narrative as inflation has been at-or-above 5% for six months now.
- The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.
It’s been a busy morning so far in US markets and this was pushed along by a really strong CPI read out of the United States, and that brought a massive bid to Gold as the yellow metal broke out and jumped to fresh four-month-highs.
As looked at previously, near-term trends did not appear to favor Gold bulls. Gold prices topped last August, around the same time that US yields had bottomed, and with the Fed talking up a possible start to tightening in 2022 at the September rate decision, it appeared as if that bullish trend in Gold was going to have to remain on hold.
But last week brought a fairly dovish FOMC outlay into the mix, even as the bank announced tapering, when Chair Powell refused to even broach the topic of rate hikes, instead saying that the bank is dedicated to attaining maximum employment. This is pretty much the same thing that we’ve heard for the past six months as inflation spiked and the Fed said it was transitory. It’s that definition of ‘transitory’ that appears to be causing problems as this morning brought another spike to CPI, with the indicator printing at its highest level in over 30 years, at 6.2%.
The Fed’s continued dovishness and apparent extreme confidence that inflation is, in fact, transitory helped to push Gold prices down around the rate decision last Wednesday. But, support caught at a higher low and after a strong day on Thursday Friday led to a breach of the 1800 level. That continued through this week and into this morning’s CPI print, at which point price action posted a sizable breakout beyond that 1834 level that had previously held the highs in July and September.
Gold Daily Price Chart
Chart prepared by James Stanley; Gold on Tradingview
Negative Real Rates Push Gold Prices Higher
Real rates are negative in the United States and with this morning’s CPI print, they became even more negative. And with a Fed that doesn’t look ready to raise rates anytime soon, the backdrop for bullish Gold setups has gotten more attractive from a fundamental perspective. The big question here is now continuation potential, and that’s likely going to be determined by if/how the Fed adapts, that will likely be the determinant as to whether this breakout in Gold has staying power.
From a technical perspective, the matter is a bit more clear. The breakout this morning took place at a huge spot of support/resistance at 1834, a level that’s already seen three separate tests since the July open. There was a lot of pressure at that level that just gave way this morning and prices propelled up to a fresh high.
If Gold bulls can hold support above this level, the door remains open for bullish trend continuation potential. The next Fed event on the horizon, at this point, is the December FOMC rate decision and this is where the bank can warn of upcoming rate hikes via the dot plot matrix. From where we’re standing now, that seems to be the next major driver for this theme, bigger-picture.
For additional support, look to the 1845 level. If bulls remain aggressive, this prior swing high/low may be re-purposed for higher-low support in bullish continuation themes.
Gold Daily Price Chart
Chart prepared by James Stanley; Gold on Tradingview
— Written by James Stanley, Senior Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
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