In a follow up to yesterday’s upside, the gold market is moving solidly higher again today as hot inflation and bullish outside market activity fuel buying. Spot prices are up nearly $15 per ounce at lunchtime on Wednesday and are now well within striking distance of resistance at the $2000 level. The latest reading of the Producer Price Index showed a rise of 11.2% year-over-year and up 1.4% from the February reading. The 11.2% year-over-year reading is the highest ever recorded and represents the highest level of price inflation in 40 years.
Outside market action is bullish for gold today. The dollar is weaker after hitting a two-year high overnight. Benchmark 10-Year Treasury yields have backed down a bit as well in a welcome relief for markets. Crude oil prices are higher again today and are currently trading around $103 per barrel. The inflation narrative is likely to continue to be the primary driver of gold prices in the months ahead. Record setting inflation may keep buyers in gold motivated to keep buying and any dips may be snatched up by open arms rapidly. The ongoing war in Ukraine may also keep this buying going, as it not only increases inflationary price pressures but may also fuel a fear of the unknown and overall risk aversion.
The U.S. Federal Reserve is likely to continue raising interest rates in the months ahead. After hiking rates by 25-basis points in recent weeks, the Fed could even elect to raise the key interest rate by 50-basis points at its upcoming meetings. A larger rate hike could help the central bank get a handle on inflation but is unlikely to deter any serious interest in gold.
Now within striking distance, the gold bulls will look to produce a close above resistance at the $2000 level. If the bulls are able to produce a close above this level, the metal could find itself off to the races and may approach previous all-time highs in rapid fashion. The bears are looking for a decline to produce a close below $1900 and then $1850. The bears will not really have much going unless prices do close below $1850 which at this point is seeming increasingly unlikely.
The market is still in no man’s land but is rapidly approaching an upside breakout. Should the market see an upside breakout it could pave the way for a quick and sharp run higher. If stock markets weaken in the weeks ahead or if other market dynamics change, the yellow metal could see a fast run higher that could take it to $3000 or beyond.
Calls for peak inflation may be proven to be premature. Today’s hot PPI reading only serves to reinforce the negativity surrounding price pressures and the seriousness of the problem. It will almost certainly take some serious action from central banks to get a grip on the issue and inflation could be here to stay for much longer than previously anticipated.