Gold futures are trading more than 1% higher at the mid-session on Wednesday in reaction to a stronger-than-expected U.S. consumer inflation report. Gains were likely being capped, however, ahead of the release of the minutes from the Federal Reserve’s latest policy meeting for confirmation of its tapering strategy.
At 15:24 GMT, December Comex gold futures are trading $1793.40, up $34.10 or +1.94%.
Gold Bulls Don’t Believe the Fed
After consolidating for nearly two weeks, gold futures jumped to their highest level since September 16 as investors bet that high inflation would linger for a lot longer than the Federal Reserve anticipated.
Earlier in the year, the Fed said high inflation would be “transitory”, but that hasn’t been the case with supply-chain disruptions pushing inflation higher for longer than previously expected. Furthermore, it looks like the issue isn’t going to go away over the near-term either despite expectations for the Fed to begin reducing its massive stimulus as early as November.
Today’s consumer inflation news and the lack of clarity from the Fed seems to have given gold buyers the confidence they need to drive prices higher in the face of rising yields and a firmer U.S. Dollar.
Typically, gold prices would fall in an environment of higher interest rates and a stronger greenback, but that hasn’t been the case with speculative gold buyers choosing to shrug off the traditionally bearish fundamentals.
US Consumer Inflation Continues to Climb
Consumer prices increased slightly more than expected in September as food and energy price increases offset declines in used cars, the Labor Department reported Wednesday.
The consumer price index for all items rose 0.4% for the month, compared to the 0.3% Dow Jones estimate. On a year-over-year basis, prices increased 5.4% vs the estimate for 5.3% and the highest since January 1991. However, excluding volatile food and energy prices, the CPI increased 0.2% on the month and 4% year over year, against respective estimates for 0.3% and 4%.
Gasoline prices rose another 1.2% for the month, bringing the annual increase to 42.1%. Fuel oil shot up 3.9%, for a 42.6% year over year surge.
Investors now await the release of minutes from the U.S. central bank’s September meeting at 18:00 GMT, amid expectations for tapering of economic support as soon as next month.
With rising inflation still a major issue, the Fed no longer has the luxury of waiting for the job market to “catch up” with the rest of the economy. Therefore, we expect central bankers to begin tapering next month.
The rally in gold suggests that investors believe that the Fed won’t be able to trim its massive stimulus fast enough to avoid making inflation a major issue. If that’s the case then the Fed is going to have to go another step further in stemming inflation and that would be moving up the timetable for its first interest rate hike in years.
Gold prices could retreat later in the session if the minutes show Fed members discussing an earlier than late 2022 date for its first rate hike.
Despite the rally, gold is still being controlled by the direction of Treasury yields. Gold speculators may have one a battle today, but conditions could change rather quickly if yields spike to the upside over the near-term.
Essentially, whether gold posts a short-term or a long-term rally will depend on how aggressive the Fed becomes in its fight against inflation. The Fed has said it has the tools to fight inflation, the question is when and how are they going to use them.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire