Gold stuck at mid-$1,800 on U.S. inflation woes

By Barani Krishnan

Investing.com -- Stickier-than-expected U.S. inflation is developing into a bugbear for gold, trapping it at mid-$1,800 levels, with technical charts indicating an eventual drop to $1,700 territory if there’s no clear breakout.

​​Gold for April delivery on New York’s Comex settled Wednesday’s trading at $1,845.30 an ounce, down $20.10, or 1%.

The spot price of gold, more closely followed than futures by some traders, was at $1,837.97 by 16:00 ET (21:00 GMT), down $16.50, or 0.9%.

Gold was initially tipped to hit above $2,000 an ounce in the first quarter of this year, reprising the rally seen in April 2022. Gold futures actually got 10-month highs at around $1,975 just before the release of the January U.S. non-farm payrolls report that showed blockbuster job gains reigniting inflation worries. Gold sank to below $1,830 in the aftermath before recovering to around $1,875.

This week’s Consumer Price Index, or CPI, report for January, released on Tuesday, further heightened U.S. inflation woes, bringing gold back under $1,850.

Higher-than-expected monthly CPI sparked worries that the Federal Reserve might turn aggressive again on U.S. interest rates just as the central bank seemed to be getting a little lax about monetary tightening.

Gold’s charts suggest that the $1,830 hold was critical for the spot price of gold to return to near the $1,870 level, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“Sustainability below $1,878, or the 23.6% Fibonacci level of retracement measured from 1,616 low to 1,960 high, has led to the extension of the correction in spot gold towards the next leg lower of $1,828, or the 38.2% Fibonacci level,” said Dixit.

“If prices do not make a sustainable break below $1,830, a rebound towards 1,860 followed by 1,868 can not be ruled out.”

However, Dixit was veering on the side of caution, saying a break of that support was likely if U.S. inflation fears kept rising, pulling gold’s twin nemesis — the Dollar Index and U.S. 10-year Treasury note yields — higher.

“If 1,828 is decisively broken with a weekly closing, spot gold may drop to $1,788, or the 50% Fibonacci level,” he added.

Gold longs are, unfortunately, caught in the crosshairs of the central bank’s fight against inflation. Every dollar and Treasury yield spike has become an opportunity to bid down gold.

Not too long ago, gold prices used to rise with inflation as investors bought the metal as a “hedge”, or store of value, against the dollar, which typically erodes in value when prices of goods and services go up. This was during normal times when good economic news was good for risk assets.

Now, good economic news — especially in U.S. jobs and wages — is bad because it has the potential to make inflation hotter, prompting the Fed to dial up rates and hurt everything from stocks to gold and oil. Thus, gold’s positively-correlated relationship with inflation has broken down and is expected to stay so, until the Fed starts paying less attention to rates.

The Fed has increased rates by 450 basis points over the past year, taking them to a peak of 4.75% from just 0.25% after the COVID-19 outbreak in March 2020. The central bank began with a modest 25 basis point hike in March 2022, dialing it upwards to 50 basis points the next month before embarking on four blockbuster 75-basis point increases between June and November last year as annual inflation hit four-decade highs. The Fed slowed its pace of monetary tightening thereafter, returning to a 50-basis point hike in December and a 25-basis point increase this month.