Gold’s Battle Royale: Inflation Vs. Interest Rates

Fundamentals

Persistent inflation pressures persisted in March, throwing a wrench in the Federal Reserve’s plans to start lowering interest rates in June and sparking doubts about whether they can do so this year without signs of the economy slowing down. According to the Labor Department’s report on Wednesday, the Consumer Price Index (CPI), which measures the cost of goods and services nationwide, rose by 3.5% in March compared to a year ago. This exceeded economists’ expectations and was higher than February’s 3.2% increase. Core prices, which exclude volatile food and energy costs and are closely monitored by the Fed, also rose more than anticipated both monthly and yearly.

“Inflation pressures remain strong everywhere,” said Blerina Uruçi, chief U.S. economist at T. Rowe Price’s fixed-income division. Inflation is “stronger than what the Fed wants to see to start lowering interest rates anytime soon.” President Biden, who previously suggested that the Fed would lower interest rates later this year, reiterated this belief but acknowledged that the latest inflation figures might delay the rate cut by about a month.

This report was highly anticipated because, in the past, Fed leaders downplayed higher-than-expected inflation, attributing it to temporary factors. However, with a third consecutive month of above-expected inflation, this explanation is no longer viable. As a result, Fed officials might postpone planned rate cuts until July or later. Some officials wanted to cut rates early to prevent a sharp economic downturn, but they may now wait longer, especially since inflation is stronger than expected.

Analysts found the details in the report equally concerning. Despite certain prices decreasing, such as those for cars, others, particularly for services, went up. Services, which include expenses like car insurance and medical care, are closely linked to the strength of the job market. Housing costs also rose, contrary to predictions.

Before this report, many economists believed inflation would start decreasing in March. However, some are revising their predictions. For instance, economists at Goldman Sachs and UBS initially anticipated three rate cuts starting in June, but now they predict two cuts starting in July and September.

This report is not the final word on last month’s prices. The Fed’s preferred gauge, to be released later this month, has historically been lower than the CPI. Overall, inflation has decreased significantly since its mid-2022 peak, but concerns persist about returning it to 2%. According to one Fed official, it is too early to consider interest rate cuts given the risks.

Surveys indicate that Americans remain frustrated by the cost of living. While consumer sentiment has improved slightly, it remains below pre-pandemic levels. A recent poll found that 74% of voters in key states for the 2024 election believe inflation has worsened over the past year.

Gold, Inflation and High Interest Rate Environment

Preservation of Value: Gold has historically been considered a store of value, particularly during times of inflation. When inflation erodes the purchasing power of fiat currencies, investors often turn to gold as a safe haven to preserve their wealth. Unlike paper currencies, which can be printed in unlimited quantities, the supply of gold is limited, making it inherently resistant to inflationary pressures.

Demand Increase: As inflation rises, investors seek assets that can provide a hedge against the declining value of money. Gold, with its intrinsic value and universal acceptance, becomes an attractive investment option. This increased demand for gold can drive up its price in times of inflation.

Central Bank Policies: Central banks may respond to inflationary pressures by implementing loose monetary policies, such as quantitative easing, to stimulate economic growth. These policies can lead to currency devaluation and heightened concerns about inflation, further bolstering demand for gold as a safe haven asset.

High Interest Rates

Opportunity Cost: Gold does not pay interest or dividends, unlike interest-bearing assets such as bonds or savings accounts. Therefore, when interest rates are high, the opportunity cost of holding gold increases. Investors may opt to allocate their funds to interest-bearing assets that offer a guaranteed return, rather than holding gold, which generates no income.

Investor Sentiment: High interest rates can indicate a tightening of monetary policy by central banks to control inflation. This may lead investors to believe that inflationary pressures are being addressed, reducing the perceived need for safe haven assets like gold. Consequently, demand for gold may decrease, causing prices to fall.

Currency Strength: High interest rates can also strengthen the domestic currency relative to other currencies. Since gold is priced in US dollars on international markets, a stronger dollar can make gold more expensive for foreign buyers, potentially dampening demand and exerting downward pressure on prices.

Overall, while gold is often viewed as a hedge against inflation, its relationship with interest rates is more complex. While high interest rates may initially suppress gold prices due to opportunity costs and changes in investor sentiment, other factors such as geopolitical tensions and macroeconomic uncertainties can influence gold demand and price dynamics.

Let’s take a look at the weekly standard deviation report and see what short-term trading opportunities we can identify in this high volatility environment

GOLD: Weekly Standard Deviation Report

Apr. 13, 2024 12:50 PM ET

Summary

• Gold futures contract closed below the 9-day SMA, indicating a bearish short-term trend momentum.
• Market closing below the VC Weekly Price Momentum Indicator further confirms the bearish price momentum.
• Traders advised to take profits at 2314-2253 price levels for short positions and wait for a reversal signal for long positions.

Weekly Trend Momentum: The analysis indicates that the gold futures contract has closed at 2374, which is below the 9-day Simple Moving Average (SMA) of 2395. This suggests that the short-term trend momentum is bearish. Traders often use moving averages to gauge the direction of the trend, with a close below the SMA indicating a potential downward trend.

Weekly Price Momentum: Additionally, the market closing below the VC Weekly Price Momentum Indicator at 2381 further confirms the bearish price momentum. This indicator uses volume data to confirm price movements. Therefore, both the SMA and VC indicators align to indicate a bearish sentiment in the short term. However, it’s mentioned that a close above the 9 SMA would shift the trend to neutral, suggesting a potential reversal in the short-term bearish trend.

Profit Taking and Reversal Points: For traders holding short positions, the recommendation is to consider taking profits during corrections at the 2314-2253 price levels. This means that if the market experiences a pullback within this price range, it could be a good opportunity to secure profits on short positions. On the other hand, for those looking to enter long positions, the advice is to wait for a weekly reversal signal before initiating trades. This cautious approach aims to ensure that traders enter positions at favorable points in the market, reducing the risk of losses.

Profit Targets for Long Positions: If traders are holding long positions, it’s suggested to take profits as the market reaches the 2442-2509 price levels during the month. Profit-taking is an essential part of trading strategy, allowing traders to lock in gains and mitigate potential losses. The specified price levels serve as targets for exiting long positions, based on the expected movement of the market.

Cycle: The mention of the next cycle due date being 4.15.24 indicates a specific date when a significant market cycle is expected to occur. Traders often pay attention to cycle dates, as they can influence market behavior. Understanding market cycles can help traders anticipate potential turning points or trends, enabling them to adjust their strategies accordingly.

Overall Strategy: The overall strategy outlined in the analysis involves a combination of technical indicators, profit-taking strategies, and awareness of market cycles. Traders are advised to stay vigilant and responsive to changes in market conditions. Whether short or long, it’s important to have clear profit-taking and stop-loss levels in place to manage risk effectively. Additionally, staying informed about market developments and adjusting strategies accordingly is crucial for successful trading.