Traders and investors are awaiting tomorrow’s CPI inflation report which will be released just before the New York market opens. The CPI is likely to be one of the most important economic reports that the government will release this month. Not only will the CPI be an essential component that will shape and influence market sentiment for retail investors, but it will also help guide the Federal Reserve’s monetary policy at next month’s FOMC meeting.
The Federal Reserve sent shock waves through financial markets when Chairman Powell suggested a ½% rate hike was a possible possibility at the June-July Federal Open Market Committee meetings. As expected, they raised the federal funds rate by ½% after this month’s Federal Open Market Committee meeting, but Chairman Powell’s announcement of a possible three simultaneous 2% rate hike was seen as optimism and had a major impact on the economy. markets.
With a few exceptions, we have seen a significant price correction occur in US stocks and in precious metals. The increased cost of borrowing capital due to the Federal Reserve’s recent and expected increases in interest rates aims to reduce demand by creating an economic contraction. This had a profound and negative impact on US stocks. Since pandemic companies in the US become addicted to free money, the extended correction is a reflection of the pain of withdrawal by companies as they adjust their forward guidance to reflect the change in the cost of borrowing capital.
Gold and silver pricing has been in a definite corrective mode since mid-April. Gold futures traded as high as 2003 USD on the 18th of April and have lost value for the past four weeks in a row including this week which is far from over. Gold futures, the most active June 2022 contract, opened at approximately $1,884 and as of 5:06 PM the EDT price is currently set at $1,837.20 after taking into account a drop in the price today at $21.40 or 1.15% . Gold is down 2.49% in the last two trading days.
Inflation is a double-edged sword for gold
High inflationary pressure usually creates bullish tones for gold prices as it is seen as an excellent hedge against inflation. However, the current scenario in which the Federal Reserve is more aggressive in terms of raising interest rates leads to higher yields in US Treasuries and a strong dollar. Both a stronger dollar and higher yields have an opposite effect on gold prices creating strong bearish market sentiment as Treasury yields reduce investors’ attraction to gold because it is a non-interest-bearing asset and because gold is paired with the dollar, there is a 100% negative correlation between the appreciation of the dollar and the pricing of gold. The net result is that rising inflation pushed gold prices to $2,078 during March (the sword edge) and then to its current price of $1,835 (the other edge of the sword). The drop from $2,078 to the current price of gold represents a decrease of 11.59%. Inflationary pressure is really a double-edged sword for gold.
The latest forecast for tomorrow’s CPI report is that inflation will fall from 8.5% to 8.1%. The question becomes how will gold prices react if the actual numbers are higher than the current estimate? While high levels of inflation have historically been very bullish driving up gold prices, an expectation of increased Fed tightening will have the opposite effect.
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