Did Gold Price Just Overreact To The Upside After The CPI Report

New York (May 12)  The U.S. dollar sold off on this CPI report and gold moved up modestly. This data does not change anything from the Federal Reserve's perspective and also dampens views for an inflationary overshoot. Any bull market in gold would be accompanied by either rising inflation significantly above target rate or Federal Reserve policy being less hawkish than expected. Both of these scenarios would push real yields and the U.S. dollar lower, which is gold price positive. The current CPI data though, signals a bearish middle ground for gold, or a stabilization in inflation around 2%. This allows the Federal Reserve to continue effectively pushing up real rates and yields.

In November 2017, I called for 2.75% to 3% 10Y yields by the end of the year. I wrote,

“Treasury prices have largely ignored rate hikes so far. I think the Treasury market is going to find itself very behind the curve on monetary policy tightening and there will be sharp upside reactions in yields as the Fed moves in December and in 2018 while allowing their balance sheet unwind to occur.

I was off by a couple months when yields reached target range in early February 2018. My intermediate term target is now 3.25%. I think the further increase in yields will not only be driven by Federal Reserve policy pushing short end rates higher and withdrawing demand due to the balance sheet unwind, but it will also be a supply side story. The Treasury department is issuing large amounts of new debt and demand at Treasury auctions is recently very tepid.

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