Gold Price Forecast: XAU/USD Breakout Holds Through CPI


Gold Talking Points:

  • Gold prices put in a major breakout last month, and so far buyers have been able to hold the bullish trend.
  • At the source of this move was the presumption that the Fed will be sitting on low rates for longer, but as more signs of inflation begin to show might the Fed be compelled to moderate their stance?
  • 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 was another week of relative calm for Gold, but perhaps at least somewhat surprising is the fact that this calm remained even through the Thursday CPI release. Inflation data continues to surprise to the upside in the US with a headline read of 5% to go along with a core CPI print of 3.8%. While both of these numbers are significantly higher than the inflation prints that we’ve become accustomed to, the Fed has also continued to say that they feel the trend is transient. This has been inferred to mean that the Fed is in no hurry to slow bond purchases or raise rates, and that’s helped a number of risk markets remain strong while trending higher.

It hasn’t been this way for much of the past year in Gold prices, however. While last June through August saw a stern topside run develop, Gold prices topped on August 7th and then spent nine months in a bearish channel.

As highlighted regularly in these weekly Gold forecasts, that channel, when taken with the prior trend, was showing as a bull flag formation. And this denoted the potential for continued upside if and when buyers would finally roll back into the market and that was largely driven around expectations for inflation and the Fed.

As it became more obvious that the Fed was not looking to adjust rates in the face of that rising inflation, Gold prices popped again to breakout of the bull flag formation in mid-May.

To learn more about bull flag formations, check out DailyFX Education

Gold Weekly Price Chart

Chart prepared by James Stanley; Gold on Tradingview

Gold Support Test at Prior Resistance Around NFP

Last week brought the first significant test of the bullish theme since the breakout took place in May, and this was largely based around the NFP release on Friday.

The area around 1860 had been widely watched as this was a Fibonacci level that was confluent with the resistance side of the bull flag. Buyer initially breached that on May 17 and a couple days later, there was a quick test of that same zone as support before prices popped up to a fresh high. But – last week – ahead of Non-farm Payrolls, prices again dipped down for a quick support test in this same zone. The following morning, when another disappointing NFP report hit the wires, Gold prices popped higher again and eventually ran towards the 1920 value.

The key takeaway here is the highlight of what’s driving Gold bulls’ behavior, and that’s the premise of the Fed not raising rates even in the face of rising inflation.

Gold Four-Hour Price Chart

Gold Four Hour Price Chart

Chart prepared by James Stanley; Gold on Tradingview

Gold as an Inflation Hedge?

Gold is often called an inflation hedge and this may be partially correct. Rate hikes, however, aren’t necessarily a positive for Gold because it increases the opportunity cost of holding the precious metal. The higher rates go, the greater the opportunity cost of holding a non-yielding asset.

But, in terms of inflation, particularly in a low rate environment when rates do remain low, there’s a case to be made for holding assets in non-fiat markets. This is not too dissimilar from what’s driven the craze in cryptocurrencies of recent: With cash yielding little to nothing, and inflation ticking in at 5%, real rates are very negative and cash balances are losing purchasing power.

So, perhaps more accurately stated, Gold is sensitive to real rates, and negative real rates of return furnish a bullish case for non-fiat instruments while rising interest rates increase the opportunity cost and diminish the value of holding these investments.

This puts a lot of focus on next week’s FOMC rate decision and market participants will be looking for even the slightest hint that the bank may be looking at ‘normalization’ of policy anytime soon. So far, the Fed has provided nothing of the like, although we have seen the Bank of Canada start to taper their QE purchases and last night the Russian Central Bank raised rates by 50 basis points.

Will this filter into the Fed at the June rate decision? The general consensus or, at least judging by equity performance this week, would allude to the fact that many market participants are thinking this won’t happen and next week will see the Fed simply say again that they feel inflation is temporary and policy will remain weak.

This could compel further topside trends in Gold and given that expectation, along with the bullish backdrop remaining on the chart, the forecast will be set to bullish for the week ahead.

Gold Technical Forecast: Bullish

Gold Daily Price Chart

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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