Another Raging Inflation Print Dims XAU/USD’s Trajectory

Gold Fundamental Forecast – Bearish

• Gold prices fell 3 percent last week as US inflation surprised higher
• The Federal Reserve will likely have to step up its fight against prices
• XAU/USD remains fundamentally biased to the downside as CPI rages

Gold prices aimed about 3 percent lower this past week as the yellow metal succumbed to the all-too-familiar fundamental backdrop that has been weighing on it since the beginning of this year. The 2-year Treasury yield touched 4.5 percent, which was the first time since August 2007. The US Dollar also aimed higher over the past 5 trading sessions.

When both Treasury yields and the US Dollar move in the same direction, this can have a profound impact on anti-fiat gold prices. XAU/USD has no inherent yield for holding the asset outside of the expected future price. A bond earns you interest, certain stocks offer dividends and even trading currencies can result in a payment stream depending on the composition of interest rates, also known as a carry trade.

So, when interest rates rise, this tends to bode ill for the yellow metal, and vice versa. Compounding gold’s weakness is a stronger US Dollar given that the yellow metal is largely priced around the world in the greenback. Thus, a lot of traders might have been caught off guard if they were looking for an inflation hedge. Despite the highest inflation around the world in decades, gold is down 20% from an all-time high.

Speaking of inflation, last week’s US CPI report carries with it important consequences. In September, both the headline and core rate surprised higher. This is not good for the Federal Reserve, which will likely have to step up its game to bring inflation down to target. Since October began, markets have been increasing odds of 50-basis points worth of tightening in 2023.

With that in mind, by fundamental principal, it is likely to remain a tough week ahead for gold. The US economic docket notably dies down outside of earnings season. But, we will get inflation data from countries like the UK and Canada. Eurozone CPI data is also on tap. Strong readings would continue to underscore the global tightening effort, undermining gold.

Gold Fundamental Drivers

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— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or@ddubrovskyFXon Twitter