Gold Recoils As Investors Assess Central Banks’ Response to Inflation

gold bars

On Monday, gold prices slipped from a more than five-month high reached during the previous season. Investors were concerned that central banks would respond aggressively to rising inflation expectations. A stronger dollar also pulled the bullion down. Though the greenback dropped by 0.1%, it remained close to a 16-month peak hit on Friday. And it made the yellow metal more expensive for investors using rival currencies.

Spot gold is currently trading at $1,860.67 per ounce as of 0801 GMT.

Yesterday, Minneapolis Federal Reserve Bank President Neel Kashkari warned the central bank not to overreact to elevated inflation. He admitted that he expected to rise further in the coming months before it starts tapers off. Kashkari said there would be more clarity on the economic outlook when the bond-buying program ends in mid-2022. He added there he is keeping an open mind on the interest rate hikes that will follow.

Two European Central Bank (ECB) policymakers shared Kashkari’s opinion. Bank of Finland Governor Olli Rehn and Bank of Lithuania Chairman of the Board Gediminas Simkus said eurozone inflation might stabilize slower than expected, but the recent price surge is only temporary. They also cautioned the ECB not to withdraw stimulus too quickly or tighten its monetary policy.

According to Warren Patterson, ING’s head of commodity strategies, higher inflation boosted the bullion. But he predicted prices to drop to $1,700 per ounce in 2022 as central banks accelerate policy tightening.

Stephen Innes, a managing partner at SPI Asset Management, added that the stronger dollar and higher Treasury yields would cap bullion prices until it breaches the $1,875-$1,880 zone. It is particularly true if the Federal Reserve signals a rate hike sooner than expected. Higher interest rates boost the opportunity cost of owning the non-interest-bearing metal.

On the technical front, DailyFX senior strategist Christopher Vecchio suggested that real yields will determine the next movement in gold prices. Inflation reports and speeches from central bank policymakers in G10 economies could also influence price movement in November.

Vecchio also mentioned that the IG Client Sentiment Index indicates that bullion prices have a bearish trading bias. Retail traders are more net-long today than yesterday and last week. This data combined with the current market sentiment suggests a strong gold-bearish contrarian trading bias.