Gold Stablizes As Elevated Inflation Takes Hold

Gold futures prices edged higher on Tuesday following Monday’s small climb.  Gold prices are attempting to form a bottom as US yields begin to retreat after climbing significantly over the past two months.  Higher US yields make the dollar more attractive which can drive down the price of the yellow metal.

As dollar yields decline the gold forward curve contracts making borrowing gold less expensive.  Gold trades similar to a currency which means that investors who purchase gold against the US dollar receive gold interest rates and pay away US interest rates.  With US yields declining, on the back of a weaker than expected data such as last Thursday’s jobless claims report and Monday’s weaker than expected release of retail sales, holding long positions in gold becomes less expensive.  The term strucuture, which is the difference between spot gold and deferred gold contracts,  has declined making future gold purchases less expensive.

Inflation data in the US is elevated but was reported in line with expectations.  According to the Labor Department CPI rose a 0.5% in June which was the largest increase since February. The energy price index increased 3.4%, spearheaded by a 6.3% gain in gasoline. Core CPI, increased 0.2%, which was also in line with expectations. CPI has climbed 1.8% over the past 12 months, up from 1.4% in May, which is still below the Feds target level of 2%.

Inflation data in the UK was mixed.  The 2.9% increase in May was the strongest level seen in the past year and more than the 2.7% increase in April.  The month over month levels were slightly better than expected.  The UK reported that CPI declined 0.2% month over month in June compared to expectations of a .1% decline.  With new central bank governor Mark Carney at the helm it will be interesting to see how the new governor deals with relatively stagnant growth and elevated inflation levels.  Last week, the BOE also announced that interest rates would remain the unchanged at 0.5%.

Technical analysis provided by Banc de Binary:  The technical picture for gold futures has been improving, as gold has created a bottom near the $1,200 level.  Support on the yellow metal is seen near the 10-day moving average at $1,256 which resistance is seen near a downward sloping trend line which comes in near $1,290.  The trend line attaches the highs in April near $1,600 to the highs in June near $1420.

Momentum on gold futures prices has turned positive as the MACD (moving average convergence divergence) index has generated a buy signal.  This occurs when the spread (the 12-day moving average minus the 26-day moving average) has crossed above the 9-day moving average of the spread.  The index has moved from negative to positive territory confirming the buy signal.  The RSI (relative strength index) which is an oscillator that measures overbought and oversold levels has edged higher with price action but is still printing near 48 which is in the middle of the neutral range.