The gold market ended last week not far from recent highs, and the yellow metal looks poised for further gains. The gold market has a few things working in its favor right now, and some key data out of the U.S. last week is seemingly pointing to yet another reason to consider buying gold right now.
Last week’s Producer Price Index as well as the Consumer Price Index both showed rising inflationary pressures. The CPI data showed a month-over-month rise of .6 percent, while consensus estimates were looking for a rise of .3 percent. This reading was the highest reading recorded in almost four years.
The core CPI data (stripping out volatile food and energy) showed a month-over-month rise of .3 percent, while consensus estimates were looking for a rise of .2 percent.
Headline year-over-year CPI showed a reading of 2.5 percent, well above the Fed’s desired target of 2 percent.
This stronger than expected inflationary data along with ongoing strength being seen in key economic data could potentially ,motivate the Fed to act sooner rather than later, and could possibly boost the odds of a March rate hike from the central bank.
Thus far, equity markets have essentially shrugged off the notion of higher rates, as hopes for major tax reforms and fiscal spending from the Trump administration keep the rally going. A March rate hike could, however, act as a shot across the bow, and stock investors may begin to get a little more anxious if the central bank follows through on a more aggressive stance with monetary policy.
Investors for now, however, are still questioning the likelihood of seeing three rate hikes this year. This does make a lot of sense, after all, given expectations for more hikes last year that never materialized. The bond market has been relatively range bound in recent weeks following the initial rump victory sell-off, and the fact that bonds have not broken further would seem to indicate that investors are not overly concerned about an aggressive Fed.
Even if the Fed does begin tightening, gold may potentially see ongoing support from rising inflation expectations and a number of geopolitical issues.
The Trump administration has seemingly had numerous issues, and more controversy surrounding the administration and its policies is a good possibility. Like the notion of rising rates, investors have thus far been able to shrug off the uncertainty that has been seen since the new administration took office. Investors have their breaking points, however, and at some point those limits may be tested if present trends continue.
In a shortened trading week due to the President’s Day Holiday, investors will focus on some key data points including Weekly Jobless Claims, Consumer Sentiment and more. The data highlight of the week, however, will be Wednesday’s release of the latest FOMC meeting minutes.
This report could potentially shed further light on the Fed’s assessment of economic conditions as well as its plans regarding interest rates.
Gold may challenge its recent highs this week, and the Fed minutes could either fuel a fresh leg higher or possibly put the brakes on gold’s recent rally. If a decent pullback in the yellow metal is seen, investors may simply view it as a buying opportunity.