Gold Price Retreats Even as Inflation Expectations Soar

The gold price has struggled in the past few weeks as the US Treasury yields rise. It is trading at $1,715, which is the lowest it had been since June last year.

Gold as an inflation hedge?

The price of gold has dropped by more than 17% since August last year. In the same period, Bitcoin and US equities have tested their all-time highs. 

Ironically, the environment has been relatively conducive for the metal. The US dollar has dropped to the lowest level in more than three years, and the US Congress has already passed a $900 billion stimulus package. The politicians are also in the process of passing another massive $1.9 trillion package.

Most importantly, consumer prices have been rising. After dropping to 0.1% in June last year, the headline consumer price index (CPI) has risen to 1.4%. Core CPI, which excludes volatile food and energy products, has risen to 1.6%.

US CPI growth

Analysts expect that consumer inflation will continue rising in the near term. In fact, inflation expectations for the next five years have risen to the highest level since 2008. Therefore, this is ironic because most investors buy gold as a hedge against inflation.

The current sell-off in gold is mostly linked to the performance of the bond market. In the past few weeks, the prices of US bonds have dropped sharply as investors have sold their holdings. This has led to a jump in the short and longer-term dated yields. Yields are inverse to bond prices.

10-year Treasury yield

Will bonds continue rising?

There is a possibility that these bond yields will continue rising. On Wednesday, data by ADP showed that the US economy added just 117,000 jobs in February. This increase was smaller than expected.

On Thursday, data by the Labour Department showed that more than 745 million Americans filed for initial jobless claims. This was an increase from the previous week’s 736,000. The continuing claims dropped to more than 4.25 million. 

These numbers came a day before the Bureau of Labour Statistics (BLS) is set to release the monthly nonfarm payroll numbers. Economists expect that the economy added less than 200,000 jobs in February after it created just 40,000 in January. They also see the unemployment rate falling to about 6%.

In addition to the $1.9 trillion stimulus package, the number of US coronavirus cases has continued to decline. This is mostly because the government has ramped-up vaccinations in the past few weeks. In total, more than 48 million Americans have received vaccinations, and the Biden administration expects to vaccinate all people in the next few months.

Therefore, a combination of stimulus and falling cases means that the economy will recover faster than expected. More so, the rising oil prices mean that the rate of inflation will also rise faster. 

Gold price outlook

The gold price has been declining in the past few weeks. On the four-hour chart, it has moved below the purple descending channel. It also remains below the short and long-term moving averages and the Ichimoku cloud. The price is slightly below the upper line of the small descending channel. Therefore, in my view, the path of least resistance for the price of gold is lower. If this happens, the next key level to watch is $1,650, which is above 4% below the current price. On the flip side, a climb above $1,740 will invalidate the downward thesis because it will send a signal that there are still more buyers.