Analysts: CPI Data Will Not Slow the Pace of Gold’s Rise
Since its initial breakout rally last month, the gold market has been unstoppable, marking new intraday record highs nearly every day. Although the momentum indicators are becoming overstretched, some analysts have said the rally still has room.
Overnight June gold futures ran to $2,384.50 an ounce; although prices have fallen slightly from their session highs, the precious metal is still holding significant gains. June gold last traded at $2,377.20 an ounce, up more than 1% on the day.
Analysts note that gold’s rally comes ahead of Wednesday’s Consumer Price Index report. The inflation data could create some volatility in the marketplace as investors try to anticipate the start of the Federal Reserve’s tightening cycle.
The CME FedWatch Tool shows that markets see only a 56% chance of a rate cut in June, down sharply from 80% priced in last month. However, these shifting expectations have yet to curb the new enthusiasm for gold.
“It seems that any news on the US is a reason to buy. Signals of a strong economy and inflation - highlight gold's property of retaining value. Weakness in inflation - fuels expectations that the Fed will be cutting rates soon, which favours demand for risk assets,” said Alex Kuptsikevich, Senior Market Analyst at FxPro.”
Although risks are rising for gold at elevated prices, Kuptsikevich noted growing risks within the broader financial market, which could support safe-haven demand for gold.
“There are risks that bulls are now ignoring the commodity mix looming over them in the form of US bond yields. 10-year treasuries have seen yields rise from 3.8% at the end of January to 4.45% on Monday. The reversal came from the lower boundary of the long-term rising channel, indicating that the smart money is wagering on a high rate scenario for the long haul,” Kuptsikevich said. “Other markets can't ignore what's going on in the government debt market for long. Stock indices are already starting to notice it, forming a smooth downtrend in early April and repeatedly testing previous trading channels. If the [inflation] outcome for the markets is a further rise in government bond yields, global markets could become more synchronised, triggering a more active sell-off in equity markets and affecting gold and other commodities. In this case, it could take months before we see further price retracement of historical highs.”
Thu Lan Nguyen, Head of Commodity Research at Commerzbank, said the gold market has the characteristics of a rational bubble as the negative correlation between prices and bond yields breaks down further.
Nguyen noted that there is still an ongoing tug-of-war in the gold market between safe-haven demand and interest rate expectations. She added while prices can go higher, caution is warranted.
“US interest rate expectations are an important driver of the gold price, but probably not the only one. For example, safe haven demand, which is also relevant to gold, is difficult if not impossible to measure. Therefore, a ‘fundamentally justified’ gold price is certainly not clearly definable,” she said. “Nevertheless, it is difficult to imagine that the divergence between the gold price and the typical fundamental drivers can continue indefinitely. This does not necessarily mean that a price correction is imminent. But at the very least, a sustained divergence is looking increasingly unlikely.”
However, other analysts note that gold has plenty of room to run as Western financial conditions are not the main driver for the precious metal.
Some analysts note that Asian demand continues to dominate the price action, pointing out that gold’s session highs have been made in the overnight session.
“China continues to play an important role in driving the global gold market, with Shanghai Gold Exchange turnover hitting a two-year high yesterday as gold pushes to new nominal highs,” said Colin Hamilton, commodity analyst at BMO Capital Markets.
At the same time, the premium between gold prices on the SGE and prices set by the London Bullion Market Association hit a new record high of around $40.
This article originally appeared on Kitco News
