Gold Breaking Out amid Loss of Investor Confidence in The Fed

The comments below are an edited and abridged synopsis of an article by David Erfle

The headline news, along with rising gold, implies that investors have accepted that inflation will continue to run hot. Despite efforts by central banks to imply that surging prices are transitory, December gold futures are headed for their biggest weekly gain in six months. Gold has moved sharply above its 50-day and 200-day moving averages.

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China’s higher-than-expected consumer and producer prices are the latest in a series of red flags about risks to the world economic outlook. China’s October CPI climbed 1.5% compared to a year ago, exceeding market forecasts of 1.3%. Factory gate inflation climbed 13.5%, the highest in 26 years.

In the US, the PPI showed an increase of 8.6% YoY as the energy percentage changed by 30% over a 12-month period. And although the CPI was predicted to rise 0.6% from September and to 5.9% YoY, the numbers for October came in at 0.9% and a whopping 6.2% increase YoY.

Amid reaction to the US CPI data being the highest in over three decades, gold managed a technical breakout above key resistance at $1,835 as real yields tumbled to record lows.

After October’s inflation data exceeded expectations, gold was pressured by investors fearing the Fed raising interest rates sooner than anticipated to tame inflation.

But the Fed continued its ‘inflation is transitory’ mantra during the FOMC meeting, and markets sense that the Fed is in a quandary regarding monetary policy. It has been unable to lower inflation without reaching maximum employment, which is difficult to achieve under President Biden’s authoritarian mandates.

As investors lose faith in the Fed’s monetary policy, several Fed members are fleeing. Two presidents resigned in September amid ethical controversy, and Randal Quarles announced that he’ll resign from the Board of Governors when his term expires at year end. Another position remains vacant, with a third position opening up in January.

An investigation into potential insider trading among Fed members may bring Jay Powell’s tenure as Chairman to an end in February 2022. President Biden may appoint Lael Brainard, as she is the only Democrat on the 7-member board.

Things are lining up well for gold to take December futures towards the $1,900 level  and retest the June high at $1,920. There are two signs this latest breakout will endure: The price is breaking higher out of a bullish technical pattern, combined with the convergence of ongoing bullish macro fundamentals, and gold continued its bullish momentum and rose for the sixth consecutive session last week, despite renewed strength in the US dollar.

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