Gold hits $1900 for first time since January, as key events loom

Gold rose above a key technical hurdle on Wednesday; spot prices (XAUUSD) rose above the $1900 level for the first time since early January. To the upside, there is not much by way of resistance ahead of the annual high just under $1960, which will be a target for many gold bulls. Gold prices have seen quiet a remarkable turn around in recent week; at the end of March, just under two months ago, the precious metal was trading close to $1680. As the end of May approaches, with gold now back above the $1900 level, gold has seen a more than 14% or close to $240 recovery from these lows at the end of last quarter. Technical buying as the precious metal broke out to the top of a long-term descending trend channel, whose upper bounds linked the 7^{th of} August 2020 and early January 2021 highs, and cleared its major DMAs has all helped.

But the major factor driving gold higher has been ongoing weakness over this nearly two-month time period in the US dollar and in US real yields. Representative of weakness in the former, the US Dollar Index (DXY) has sunk from late-March highs just under the 93.50 mark to current levels around 90.00, a roughly 3.7% reversal. When the dollar depreciates, it makes USD denominated gold more attractive to international buyers. Over the same time period, US 10-year TIPS yields (the inflation expectation adjusted, or real, yield on 10-year US government bonds) has fallen back from March highs around -0.6% to current levels close to 0.9%. Gold, a non-yielding asset, performs well when the yield on bonds falls, as it makes allocating capital to gold comparatively more attractive versus holding the capital in bonds.

Aside from a few hawks who are pushing to get the conversation on QE tapering going, most Fed members have stuck to the bank’s dovish script, which goes something like this; it is too early to start talking about tapering the rate of asset purchases, given that the Fed remains a long way from its policy goals (its employment goals, anyway). Inflation may seem as though it has reached or even exceeded the Fed’s goals, but the view the current spike as transitory, and rates are thus to remain at near-zero levels until the bank meets its inflation and employment goals sustainably and in the long-term… quite a dovish message and one that has weighed on real yields and the US dollar, the latter of whose woes have been worsened as central banks elsewhere in the world act to tighten policy or at least withdraw some of that pandemic emergency related stimulus unleashed last year.

Another factor widely argued to have been supportive of gold prices as of late has been weakness in crypto-currency prices such as bitcoin; these crypto assets have been touted as having “inflation hedging” qualities similar to that of gold, so their “demise” (if you can call it that, there remains a strong chance that crypto markets recover strongly) is arguably helping gold. Crypto markets do face some serious hurdles, however, chief among them being government authorities who want digital currencies of their own (like in China where the digital yuan is currently being rolled out) and do not want competition – hence recent action taken by Chinese authorities to curb crypto currency usage in the country. If regulatory authorities keep up their anti-crypto momentum, gold could benefit.

Turning more to the immediate future, the key economic event for gold traders to keep an eye on this week is the release of April Core PCE data on Friday. This is the Fed’s favoured gauge of inflation and is expected to rise sharply to 2.9% YoY in April from 1.8% in March, as it moves higher in tandem with CPI and PPI data released earlier in the month (the former hit 4.2% YoY and the latter went above 6.0% YoY in April). As noted above, most Fed members (other than a few fringe hawks who are in a minority on the committee) have been consistent in maintaining the message that the current spike in inflation being endured in the US economy is “transitory”, or, in other words, unlikely to persist over the long-term.

Weak base effects as a result of the dip seen in many prices this time last year as a result of the first Covid-19 lockdowns (and the dip seen in commodity prices at the time) are sure to fade quickly. A surge in demand over summer as the US economy emerges from the pandemic is also likely to give prices a temporary kick. However, analysts fear that other factors that the Fed also judges to be transitory, such as supply chain disruptions and labour market shortages, which are also boosting prices right now (PPI in particular!) may prove more persistent. Commodity price momentum, though having received a bit of a knock as of late after Chinese authorities stepped in over the past few weeks to dampen excessive speculation, seems likely to remain positive over the course of the coming year amid expectations for a strong global rebound. Prices will at least settle at elevated levels, analysts suspect. This is likely to be another factor that provides an ongoing tailwind to inflationary pressures.

A much higher than expected Core PCE number on Friday could add to fears that the Fed is making a mistake in thinking inflation will be transitory; these fears would support gold and arguably have been in recent weeks. Similarly, a much weaker than expected headline Core PCE number is also likely to be positive for gold, as it would imply more Fed accommodation for longer (which would likely be USD and real yield negative).

Looking a little further ahead; next week is also going to be a biggie for gold, with the release of a number of key US data points. Things are set to start off on a quiet note, with most markets in Europe and North America shut for public holidays. However, things are set to heat up immediately, with the release of the ISM manufacturing PMI survey for the month of May set to be released on Tuesday, followed by the release of ISM’s service sector PMI survey for the same month and ADP’s estimate of non-farm employment change in May on Thursday. Each will be important in helping the market set expectations for the most important data release of the week; Friday’s official US labour market report for the month of May (or NFP, as many calls it).

After last month’s much poorer than expected NFP number, next Friday’s jobs data will be of particular importance. Will the US economy make up for weakness in April in May? Alternative indicators of employment (initial jobless claims, employment sub-indices from various surveys) have been fairly positive so far this month, meaning employment could come back with a bang. The ADP number and employment subindices of the two ISM reports will help form these expectations, as noted, and if the US economy does post a strong recovery, this is likely to be positive for risk assets. It is unlikely, however, to push the Fed from its current ultra-dovish stance, given they still want to see substantially more progress towards their goals. If a strong NFP number does trigger risk on, this may well be negative for USD as a result of downwards pressure on safe havens, which could ultimately be good for gold. If good data pushes yields higher, however, this is likely to pressure gold. But the longer-term outlook for gold continues to look bright as long as the Fed is happy to stand by and watch as inflation rises whilst keeping its policy stance ultra-accommodative.