Gold: Fed Hold Leaves Real Yields and Today’s Inflation Data in Focus

Gold opens the Thursday session facing the Federal Reserve decision that paused without declaring victory over inflation. The October 28 decision maintained the federal funds target range at 3.75% to 4%. The vote was 10 to 2, with Lisa Cook and Beth Hammack favoring a quarter-point rate increase. The statement described continued economic strength and elevated inflation running at the same time.

Positive Real Yields Remain a Meaningful Problem for Gold

The practical issue for gold is the return available on competing assets. Treasury’s October 28 daily par real yield table showed a 10-year rate of 2.67%, up from 2.64% on October 27. It remained below the 2.80% recorded on October 19. The 5-year real yield was 2.36% on October 28.

The chart below shows every available business-day observation from October 19 through October 28. It shows why describing yields as simply rising or falling can be a bit misleading when trading gold. The latest daily move and broader movement over the selected period point in different directions.

Positive real yields remain a meaningful problem for gold, but the hurdle can change without a policy rate adjustment. Investors compare the prospective value of holding bullion when return is available elsewhere. A decline in real yields can reduce that opportunity cost, so this is something that must be watched.

CPI

Inflation does complicate the comparison. BLS reported on October 14 that September’s CPI headline rose 0.6% on the month and 3.7% over the year. Core CPI increased 0.3% monthly and 2.6% annually. Gasoline did rise 9.1% during the month and accounted for more than half of the headline monthly increase.

Energy-heavy inflation can produce competing responses. Some investors may seek protection against lost purchasing power, which would, in theory at least, help gold. Others may expect monetary policy to stay restrictive, which in theory could work against gold.

Advance GDP and PCE

The most recent announcement was earlier during the session at 8:30 a.m. Eastern. The advance estimate of third-quarter GDP, quarter over quarter, was 3.4%, above the expected 3.2% reading, but core PCE month over month came in at 0.3%, as anticipated.

Firm growth alongside persistent price pressure could sustain concern about restrictive policies. Slower inflation with continued expansion would allow investors to reconsider the future interest-rate path. Right now, it looks like growth and inflation remain somewhat elevated.

The most constructive combination going forward would be easing real yields and renewed demand for portfolio protection. As things stand right now, it looks like gold is still taking it on the chin.

Technical Setup

From a technical analysis standpoint, it’s worth noting that gold has dropped during the trading session, and it looks as if the $4,000 level remains the floor in the market. Breaking below $3,900 would be a very ugly turn of events, while a move above $4,100 could bring in the idea of retesting the $4,200 barrier above.

I believe at this point, the interest rate markets and central banks will continue to be some of the biggest movers of markets. Longer-term, I believe in gold, but the setup isn’t really showing itself in this environment.

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