Gold Moves Higher on Inflationary Concerns and Accommodative Central Banks

As of 4:25 PM EST gold futures basis, the most active December contract is currently up $9.50, or 0.53%, and fixed at $1826.40. Silver has also shown significant gains today, with the most active December contract up $0.388, or 1.61%, and is currently fixed at $24.545. While dollar weakness is a definite contributor to today’s gains in the precious metals, it is inflationary concerns and central banks globally maintaining an extremely accommodative monetary policy that is the driving force behind gold’s recent moves. The dollar declined a total of 0.287 points, or 0.30%, with the dollar index currently fixed at 94.035.

The last time gold prices traded at these levels was September 3, 2021, when gold hit a high of $1837 and closed at $1833. Since then, we have seen gold futures value trade to a low of $1720 on September 29 and September 30 before recovering. However, through the month of October, gold managed to test but unsuccessfully maintain a price point above $1800, which proved to be a strong level of resistance.

That all changed on November 4, Thursday of last week when market participants had a delayed reaction to statements made by the Federal Reserve, ECB, and Bank of England. All three major central banks backed off their stance to raise interest rates at a faster pace than originally announced to curtail the mounting and rising inflationary pressures.

Although inflationary pressures have grown substantially, central banks collectively have indicated that interest rates would remain at their current level, at least for the near term. Although the Federal Reserve announced that it would begin the tapering process this month, Chairman Powell indicated that even though they will begin to reduce their monthly asset purchases, their balance sheet of $8.6 trillion in assets would provide the needed liquidity and low-interest rates to continue to aid in the economic recovery. While they discussed and set into motion a plan to reduce their monthly purchases they made no statements in regards to liquidating any of their massive holdings.

If you recall, when the Federal Reserve first used quantitative easing in 2009, they accumulated assets totaling $4.5 trillion. As they began to unwind and end their quantitative easing program, they also began to liquidate their $4.5 trillion asset balance. However, there were only able to liquidate $800 billion, taking their asset sheet to $3.7 trillion before they perceived further liquidation would hurt the economy in the United States, which had just recovered from the banking crisis in 2009.

Market participants and traders will be intensely focused on Wednesday’s U.S. inflationary report to indicate whether or not inflationary pressures are stabilizing or as many perceive, continuing to rise. In October, government data indicated that inflationary pressures decreased slightly with the CPI-U (Consumer Price Index for urban areas) going from 5.4% to 5.3%.

However, even though October’s data for inflationary pressures in the month of September came in fractionally lower than the previous month, it still indicated that higher inflation was affecting consumers in the United States as prices for energy, food, and rent continued to spike over 5%. With inflationary pressures likely to remain high for the months ahead, this should be highly supportive of gold prices moving past the highs gold traded to at the beginning of September, which is where we currently have our first level of technical resistance, at $1835. The last three trading days have transformed the key psychological level of $1800 per ounce, which we now believe is major support rather than resistance.

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Wishing you, as always, good trading and good health,

Gary Wagner