Gold heads south for the winter

In this week's market report

• US inflation is red hot

• High inflation and low growth risks stagflation

• Uncoordinated hikes risk re-run of 1980s

US Dollar gold price [XAUUSD]
Daily

Gold heads south for the winter: Thursday’s trading session saw the yellow metal shed US$25 per ounce (1.50%) however gold is down 1.95% overall for the week, to US$1,708.
Inflation in the US shows no signs of slowing and the market has baked in a 1% increase from the Fed in July. The Euro reached parity with the US dollar, further putting pressure on gold as greenbacks become the preferred safe haven investment.

US inflation is red hot: June CPI data showed a 1.3% month-on-month increase, following a 1% increase in May.

• Annual inflation in the US is now 9.1%, the highest since November 1981.

• The consensus was 8.8%.

• Energy prices rose the most, up 41.6%, the biggest jump since April 1980.

• The ongoing high prints suggest ‘all bets are off’ as a 100 basis point hike is expected at the FOMC later this month.

US dollar reaches 20 year high: The Dollar Index (a proxy for the value of the US dollar) reached 109 overnight, a level not seen since June 2002.

Euro hits parity with US dollar overnight: The Euro falls to parity with the US dollar for the first time in 20 years, bolstering faith in the US dollar.

< /> < /> <>> > <>> <>> <>> <>> </> <>> />   <> <>< href>Silver is down 4.35% to US$18.39* Platinum has fallen 4.71% to US$821

• Palladium is lower by 4.67% to US$1,893 Bulls, this is not your week: A spot gold rally is unlikely this coming week, though a short burst of bargain hunting may push the metal up to test US$1,725. Au is likely to meet resistance at this level, and then again at US$1,750.

Bears, the trend is your friend: Spot gold is poised to dip below US$1,700 in the next two weeks as US dollar strength increases. Support for the yellow metal sits around US$1,675-80.

• Applying a Fibonacci retracement from the March 2020 low to the August 2020 high, we see spot gold has fallen through the 50% retracement level (US$1,760).

• The 61.8% retracement sits at US$1,690.

• Breaching 61.8% could see gold fall into the US$1,580s. Highly unlikely, but worth noting.

Gold in Australian dollars hovers in AU$2,500s: Currency fluctuations is keeping gold in Australian dollars range bound, sitting at AU$2,573 per ounce. The Australian dollar continues to fall, down 1.37% to 67.46 US cents.

Why isn’t gold rising with inflation?

Not a lock step move: Inflationary environments are positive for gold, but the yellow metal doesn’t move lock step higher as inflation numbers creep up. Prolonged periods of inflation provide a supportive environment for gold, but other factors influence the gold price:

High inflation and low growth risks stagflation: Persistent inflation and an economic slowdown in the US suggest that a period of stagflation is coming. The Fed is aggressively tightening rates into falling economic output, risking a hard landing for the US economy. We discuss why stagflation will be positive for gold over here, from 18 minutes onwards.

Uncoordinated hikes risk re-run of 1980s

Synchronised central bank policies ended with the pandemic. Instead, rates are being set to suit local economic conditions. Professor Obstfeld, former International Monetary Fund chief economist says this risks a repeat of the deep global recession of the 1980s.

Obstfeld notes that central banks left rates too low for too long and they are playing catch up today. More to the point, emerging markets increased their US dollar dominated debt to survive Covid related issues. Obstfeld warns the biggest economic shocks are still ahead, saying to ABC News:

‘We saw something like that in the early 1980s when the Fed was fighting inflation hard…the dollar appreciated to stratospheric heights [and] depreciations that US trade partners experienced hampered their efforts to disinflation, so they raised interest rates probably more than they would have otherwise.

‘And so we got a very deep global recession which spilled over to emerging markets in the form of the debt crisis of the 1980s and I think there is a risk of something similar now.’

Calling it a ‘global cocktail’, Obstfeld notes that thinking about domestic policy only ignores the interconnectedness of financial markets and economies.

Even though gold is facing headwinds at present, Obstfeld is offering an alert about further stresses ahead which will benefit gold in the long term.

Inside our office this week…

Even as the gold price is coming under increasing pressure, investors acknowledge the uncertain economic environment they are navigating.

Stagflation is a real risk, and precious metals like gold outperform during this. Many investors this week have increased their gold positions with our ABC Bullion 50g Gold Cast Bar.

Warm regards,

The ABC Bullion Team