The gold market is higher, albeit not by much, as the markets figure out which way they wanna run in the aftermath of another inflation report that came in not as hot as expected. The lower inflation data may be a positive for risk assets such as stocks, and that may keep some selling pressure on the gold market. The Producer Price Index released this morning showed a decline of .5% and a year-over-year rise of 9.8%. The data is another sign that inflation could have possibly peaked and may give the Federal Reserve something to think about when it meets again next month.
Risk appetite has improved today as the combination of yesterday’s lower CPI figures and today’s PPI data give markets something to consider. If inflation has in fact already peaked, it stands to reason that it could trend lower in the months ahead. This could not only give the Fed reason to consider a pause from its rate hikes, but may also boost stocks and risk assets along the way. Should equity markets react favorably to the data, it could make it more challenging for gold to gain upside traction.
The dollar is weaker following the inflation data today and yields are steady. These have both posed serious roadblocks to higher gold in previous months and may continue to do so unless current trends are reversed. The dollar has been riding high on the notion of higher interest rates and an aggressive Fed. Should the central bank decide to take a pause, however, or if it elected to reverse course and start easing, the dollar could see much of its hot air let out rapidly. Dollar weakness may also affect yields, and yields could potentially decline alongside the currency.
A declining dollar and lower yields could pave the way for a sustainable run higher in gold. Until such time as those occur, however, the bulls may remain stymied in the face of an aggressive Fed, higher rates and other geopolitical factors. The gold market may have a tough time moving higher at this point regardless of whether inflation is rising or easing. The bulls will need to produce a close above the $1800 level to get things going.
The market is well within striking distance of the $1800 level and such a test could be seen today or in the next few sessions. Should the bulls take this level out, it may attract a fresh wave of buyers that could propel the metal higher and do so quickly. This could even put the $1900 area within reach. A test of $1900 could be key, as a close above it could set the stage for a rally that could run all of the way back towards previous all-time highs.
With several weeks until the next FOMC meeting, the markets will have to weigh the data stream and consider the Fed’s options. Markets were expecting another 75-point rate hike coming into today. That forecast may have changed, however, in light of the less inflationary data released this morning.