Gold Firms Above $1,800/oz on Smaller-Than-Expected Rise in U.S. CPI

Gold prices climbed past the $1,800 per ounce level as the weak U.S. inflation data eased concerns about the Federal Reserve’s tapering plan. The August consumer price index (CPI) weighed on the greenback and pushed the benchmark U.S. 10-year Treasury yield to its lowest level since August 24. The soft dollar boosted the bullion’s appeal to investors using rival currencies. And the lower yield reduced the opportunity cost of holding the non-interest-bearing gold.

Spot gold is currently trading $1,801.75 per ounce as of 0820 GMT.

The Labor Department reported yesterday that CPI rose just 0.1% in August, 0.2% lower than analysts’ forecast. It was the smallest increase in six months. Some experts believe the inflation rate has already peaked, while others expect it to remain high because of supply shortages.

Several Fed officials suggested tapering asset purchases this year. But the tamer-than-expected CPI growth may delay tapering and extend the central bank’s super-easy monetary policy.

ING analyst Warrant Patterson commented the CPI data supported an upward movement in gold prices. But it could go down to $1,700 when the Fed announces the tapering timeline and starts considering interest rate hikes.

DailyFX analyst Thomas Westwater added that the markets may have overreacted to the inflation miss because inflation remains above the Fed’s 2% target. Also, the central bank will definitely scale back its asset purchases. And when it does, Treasury yields will go up and put pressure on gold prices. Westwater noted that gold prices breached its 20-day Simple Moving Average and its 26-day Exponential Moving Average. If these averages hold as support, then gold prices may extend their upward momentum. He sees potential resistance at $1,834.14 per ounce.

His colleague, senior strategist James Stanley, sees bullish bias in long-term gold prices. It was based on the volatility pattern in the August trade and the formation of a bull flag pattern that suggests a topside breakout potential. Stanley noted the formation of what appears to be an inverse head and shoulders pattern that is meshing with the bull flag. He also mentioned that gold prices appear to be positioning in advance of the Federal Open Market Committee’s meeting next week.