Gold Bulls Poised to Take Out Weak Shorts Ahead of CPI Data

Comex gold futures are inching higher early Wednesday, hovering near a two-week high just under a key technical level that if breached with enough buying volume could trigger a more than $20 breakout to the upside.

Strong speculative buying tied to a widely expected robust U.S. inflation reading this week is driving prices higher despite elevated U.S. Treasury yields. The price action suggests that the bulls believe it’s going to take more than just a 25-basis point increase in interest rates by the Federal Reserve in March to stop inflation from rising.

At 06:10 GMT, April Comex gold is trading $1828.50, up $0.60 or +0.03%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $170.60, up $0.49 or +0.29%.

Robust Inflation Data Expectations

Despite the surge in U.S. Treasury yields this week, the spotlight is clearly on this week’s U.S. consumer inflation data, due to be released on Thursday at 13:30 GMT.

Robust data on inflation – which hit its highest annual level in nearly four decades in December – could further bolster the case for a more aggressive Fed and extend the climb in yields.

If you recall, U.S. consumer prices increased solidly in December as rental accommodation and used cars maintained their strong gains, culminating in the largest annual rise in inflation in nearly four decades, which bolstered expectations that the Federal Reserve will start raising interest rates as early as March. This was confirmed later in the month when the Fed released its monetary policy statement.

The U.S. Consumer Price Index (CPI) for January is expected to have risen 0.5%, culminating in an annual rise of 7.3%, which would be the largest such increase since 1982, according to a Reuters poll.

Treasury Yields Dip, Dollar Sideways

Perhaps providing some support for gold early Wednesday is an overnight dip in U.S. Treasury yields. This comes after the benchmark 10-year Treasury yield rose to 1.96% the previous session.

Short-Term Outlook

Bullish gold traders essentially have the green light to do whatever they want until 13:30 GMT on Thursday when the CPI report is released.

This includes taking out buy stops above a key technical level at $1833.90 and taking advantage of relatively thin market conditions. In other words, it won’t be hard for aggressive buyers to “paint the tape”, while driving out weak shorts and sucking in traders who think they are missing the boat on a major rally. That type of price action tends to kill rallies rather than sustain them.