According to Edward Meir, gold needs to see progressively higher inflation to boost its price, and that low inflation readings are not good for gold. “We’re not seeing gold really making its move and it’s because there is a perception that we’re approaching peak inflation” he says. The main reason why gold’s performance is affected by inflation is that gold is considered a safe haven asset. In other words, the commodity is expected to retain its value during turbulent markets. Investors across the globe use gold as a hedge against inflation. However, if there is no inflation and the markets don’t appear to be turbulent, the demand for gold drops.
Gold prices slid a little last Friday triggered by the US employment data, which surpassed expectations but simultaneously raised concerns that the monetary policy will tighten further. Spot gold slid 1% to $1,848.67 per ounce, while US gold futures fell 1.1% at $1,850.20.
Better-than-expected May employment data in the US could be perceived as an indicator that the labor market remains stable despite interest rate hikes. The Fed could see this as a sign of ability to raise the interest rates at a faster pace. This could affect gold prices as gold doesn’t yield interests or dividends. This means that investors could potentially turn their attention to other assets such as bonds or stocks. And sure enough, bonds and 10-year Treasuries were trading higher at the start of the week, breaking the 3% level.
Cleveland Federal Reserve Bank President Loretta Mester has already indicated that if there was no “compelling” evidence that inflation has peaked, the Fed could hike the rate by 50 basis points in September. Such an increase wouldn’t come as a surprise against the backdrop of The Reserve Bank of Australia deciding on a 50-basis point increase in the cash rate this week, and rumors that the ECB will do the same.
As a new trading week opened, gold prices dropped on Monday but then saw a slight recovery on Tuesday. The commodity seems to be performing better than expected, yet its price action doesn’t seem to point towards a potential bullish momentum.
In the meantime, investors are preparing for this week’s key economic events such as the ECB’s policy decision on Thursday, as well as the US CPI (Consumer Price Index) data on Friday. Although the Fed uses the PCE (Personal Consumption Expenditures) Price Index as its preferred inflation gauge, the US CPI reading could create a trigger in the markets. This is because a better-than-expected CPI could trigger further interest in yields and divert even further attention away from XAU/USD.
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