Gold Forecast: Will Weaker-Than-Expected Core CPI Data?

Gold Forecast: Gold futures closed higher for a third straight week while posting its best performance in seven as Treasury yields dropped to their lowest levels since February, dragging down the U.S. Dollar.

Gold Forecast

Lower bond yields reduce the opportunity cost of holding non-interest bearing gold, while a weaker U.S. Dollar tends to drive up foreign demand for dollar-denominated gold. Last week, August Comex gold futures settled at $1810.60, up $27.30 or +1.53%.

Gold has been underpinned since June 29 on easing concerns over an earlier-than-expected rate hike by the Federal Reserve. This idea was supported by a mixed bag of U.S. jobs data on July 2, however, gains were capped last week after the minutes from the U.S. central bank’s June policy meeting were released on July 7. This suggests that investors are having a hard time digesting the minutes. Something inside the report is triggering a mixed reaction by gold traders.

The jobs report showed U.S. companies in June hired the most workers in 10 months, but unemployment ticked higher, workforce participation didn’t budge and the pace of hourly earnings growth slowed. This was enough to bring in the buyers. However, the lack of clarity from the Fed minutes seems to have stopped the buying.

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Minutes of the U.S. Federal Reserve’s June policy meeting released last Wednesday showed that while the economic recovery “was generally seen as not having yet been met,” Fed officials agreed they should be poised to act as if inflation or other risks materialized.

In minutes that reflected a divided Fed wrestling with new inflation risks but still relatively high unemployment, “various participants” at the June 15-16 meeting felt conditions for reducing the central bank’s asset purchases would be “met somewhat earlier than they had anticipated.”

Others saw a less clear signal from incoming data and cautioned that reopening the economy after a pandemic left an unusual level of uncertainty which required a “patient” approach to any policy change, stated the minutes, which were released last Wednesday.

Gold Forecast
This week, gold investors will get the opportunity to react to consumer inflation data on Tuesday, producer inflation data on Wednesday and retail sales data on Friday. Federal Reserve Chairman Jerome Powell is also scheduled to testify on Thursday.

Last month, gold prices weakened and the dollar rose to a one-month high after the U.S. consumer inflation report showed inflation speeding up. Gold was trading at $1896.40 on June 10 when the CPI report was released.

The Fed has called the rise in inflation “transitory” so a steady to higher number will likely support the notion of an earlier than expected tapering of its bond buying. This is a form of tightening so it is likely to weigh on gold prices.

Gold Forecast

A big miss to the downside by the CPI data may cause the Fed to back off from its tapering plans. This could be supportive for gold prices. June CPI is expected to come in at 0.5%. This is lower than the previously reported 0.6%. Core CPI is expected to come in at 0.4%, a substantial decline from the previously reported 0.7%.

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