Gold Traders Shifting Focus to Timing of Fed Tightening

Gold futures are trading flat shortly before the release of the December U.S. consumer inflation report on Tuesday at 13:30 GMT. But that doesn’t tell the whole story, the price action so far this week indicates there is a strong bias to the upside going into the report.

This bias became stronger on Tuesday as investors absorbed remarks from the Federal Reserve that interest rates are likely to rise this year, as expected. Gold traders appear to have accepted the Fed’s plans to tighten policy but are still having doubts about how fast it will take policymakers to reign in rising inflation.

At 12:49 GMT, February Comex gold is trading $1818.00, down $0.50 or -0.03%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $170.30, up $2.04 or +1.21%.

Perhaps the biggest takeaway from Powell’s testimony on Tuesday is this:  The Fed would raise rates and end its asset purchases this year, but the central bank had made no decision about the timing for tightening policy.

The first part of that statement is bearish, but the second part gives gold traders the hope that there is still time for prices to move higher. Some especially bullish gold traders may also feel that if the Fed was wrong in calling inflation “transitory” last year, they may be a little late to the party with its tightening plans and the whole process of driving inflation lower may take a lot longer than previously expected.

Fed Members Have Different Opinions on Pace of Tightening

The U.S. Federal Reserve should begin to reduce its holding of U.S. Treasury bonds and mortgage-backed securities accumulated during the pandemic in the not too distant future, Kansas City Fed President Esther George said on Tuesday, the latest policymaker to urge a swifter runoff of its balance sheet than during the last tightening cycle.

Earlier in the week, Atlanta Fed President Raphael Bostic said high inflation and a strong economy warrant a rapid rundown of Fed asset holdings to draw excess cash out of the financial system as he advocated completing the process in a couple of years. He also said the Fed may have to raise interest rates at least three times this year, beginning as soon as March.

Daily Forecast

Looking ahead to today’s report, the consumer price index is released by the Labor Department Wednesday and is expected to show headline inflation jumped by 7%, its fastest pace since 1982.

The Federal Reserve is already on a path to raise interest rates to battle rising prices. A hot number should justify the Fed’s policy shift.

Economists expect the consumer price index (CPI) rose 0.4% in December, and 7% on a year-over-year basis, according to Dow Jones. That compares to a 0.8% jump in November, or a 6.8% gain year-over-year, the highest since 1982.

Excluding food and energy, CPI is expected to have risen 0.5% or 5.4% year-over-year, when the Labor Department releases the data Wednesday at 13:30 GMT.

I don’t think the CPI report is as important to traders as the timing and pace of the Federal Reserve’s tightening plans. Therefore, I’m looking for a knee-jerk reaction to the inflation data with traders quickly putting more of their focus on when the Fed will begin raising rates and reducing assets. This could be the source of volatility for weeks to come.