Waning inflation supports gold prices, but it might not be enough to stop the Fed's rate hike

NEW YORK (July 11) Waning inflation is helping to breathe new life into the gold market, pushing prices to a four-week high and testing some initial resistance at $1,940 an ounce.

The rally in gold prices comes after the New York Federal Reserve, on Monday, said its Survey of Consumer Expectations for June saw one-year inflation rise 3.8%, down from 4.1% reported in May. This was the weakest inflation reading since April 2021.

Meanwhile, economists also noted that used car prices, a significant contributor to inflation, dropped sharply in May. According to the Manheim Used Vehicle Value Index, prices fell 10.3%, one of the biggest declines on record. The index also shows used car prices have dropped for the last three months.

Some economists and market analysts have said this is a surprising deflationary signal as the supply of used cars remains; however, the supply of new vehicles for sale is improving as demand weakens.

All eyes are now on Wednesday's Consumer Price Index. According to consensus estimates, economists are looking for annual consumer prices to rise 3.1%, down from 4% reported in May.

The weak inflation data is not having an immediate impact on interest rate expectations. The CME FedWatch Tool shows that markets continue to brace for a 25-basis point hike from the Federal Reserve later this month.

However, some analysts have said that weak inflation could mean that the July move could be the last in this tightening cycle. Expectations that the Federal Reserve's monetary policy is peaking have caused 10-year bond yields to fall back below 4% at the same time the U.S. dollar Index is seeing some significant weakness.

The USD Index dropped below support at 102 and is currently trading at two-month low at 101.833 points. At the same time, August gold futures, down from session highs, last traded at $1,935.80 an ounce, up 0.25% on the day.

Ole Hansen, head of commodity strategy at Saxo Bank, said in a research note that gold prices were trading at their 21-day moving average. He added that if prices can hold above $1,939 an ounce, that could signal a move back to major resistance at $1,958.

In comments to Kitco News, Hansen has said that gold needs to get back above $1,960 to attract new bullish momentum.

Darin Newsom, senior market analyst at Barchart.com, said he would expect to see some renewed buying interest in the near term if prices can hold above $1,942 an ounce.

Craig Erlam, senior U.K. and European market analyst, at OANDA, said it is still unclear if gold is ready to breakout higher.

"It seems gold bulls are feeling a little more confident, although $1,940 still poses a test, having been a notable area of support in late May and the first half of June," he said in a note Tuesday. "We could just be seeing a corrective move after such a strong pullback from the highs in May, although a strong inflation number again tomorrow could send it lower once more."

Although inflation pressures have subsided, some analysts have said that the threat of higher consumer prices has not entirely disappeared. Michele Schneider, director of trading education and research at MarketGauge, said that she sees the current inflation talk as nothing more than number crunching and does not reflect real-world conditions. She noted that oil prices remain elevated, trading at a one-month high.

"I still believe that they are measuring that sentiment by looking in all the wrong places," she said.

Schneider added that while consumer prices in the U.S. may be falling, global inflation pressures remain elevated. She highlighted wage growth in the U.K. as a sign that global inflation remains a concern.

Tuesday, the Office for National Statistics, said that basic wages in Britain rose 7.3%. The report noted that this was the strongest rise on record in private sector pay growth outside the pandemic period of 7.7%.

Besides inflation, Schneider said that gold remains an attractive safe-haven asset as geopolitical uncertainty remains elevated. She said that gold prices have room to move higher as NATO allies attend a summit in Sweden.

Although gold is catching a bid Tuesday, Schneider said she would like to see silver participate in the rally for the gains to be sustainable.

Silver is seeing some modest selling pressure Tuesday with September silver futures last trading at $23.315 an ounce, down 0.13% on the day.

KitcoNews