Gold Fundamental Forecast: US Yields and USD Guide Gold Ahead of CPI

Fundamental Outlook for Gold Clouded by Oscillating Sentiment

Global financial markets navigate through a rather challenging and constantly changing environment and gold is no different. Last week we had arguably one of the busiest schedules on the economic calendar that will have all year with three major central bank decisions, nonfarm payroll data and crucial PMI services data to name a few. That being considered it was the nonfarm payroll data and PMI data that stole the show, Significant sell off in the precious metal towards the end of last week, which has somewhat stabilized, as markets look ahead to next week’s crucial inflation print.

Now with this influx of economic data, comes a constant repricing of forward-looking expectations, which has the potential to facilitate choppy trading should the data contradict prevailing narratives (soft landing, resilient US economy, inflation fight not over).

Last week the Fed attempted briefly mention the disinflation that we had seen thus far but stress that rates are on track to head higher. The market perceived this as dovish and bought up equities as the dollar slid. Not long after, a super-hot labor market and a phenomenal recovery within the services sector reversed the direction of travel for gold and the dollar.

Dollar, US Yields Remain Key for Gold Prices

Gold has gotten off to an impressive start in 2023 and remains up for the year despite the recent sell off. As interest rates rise at a slower pace and inflation starts to ease off, real yields should turn lower, and this tends to support gold valuations. The chart below highlights the recent point of departure as the US 2-year yield accelerated above 4.5%, sending gold lower.

Daily Gold Chart Compared with US Treasury 2-Year Yields

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Source: TradingView, prepared by Richard Snow

US dollar trends will also guide gold movement as a higher dollar makes gold more expensive for foreign buyers and a lower dollar eases the cost of the transaction for the dollar denominated metal.

Inflows into the world’s largest gold ETF (SPDR Gold Trust) are net positive for the year despite the selloff, according to the most recent data. This highlights the change in fortune for the yellow metal from last year which saw a net outflow of more than $2.4 billion.

Etf.com GLD ETF Net Flows for 2023 to date

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Inflation Still Important for Gold as Far as it Affects US yields

While gold’s positive correlation with inflation is better observed over the long-term, the correlation between the two breaks down over the short to medium term but since it is such a massive market theme right now, inflation should still be monitored. Inflation data guides treasury yield dynamics which also feeds into the value of the US dollar. Yields and the USD have more of an effect on recent gold prices than the actual level of inflation. Forecasts suggest there will be another round of lower core and headline inflation for the month of January.

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