Price of Gold Fundamental Daily Forecast – CPI on Tap but Bond Auction Results Could Trigger Volatile Response

Slightly firmer U.S. Treasury yields and a recovery in the U.S. Dollar against a basket of major currencies are keeping a lid on prices on Wednesday.

At 13:01 GMT, April Comex gold is trading $1710.40, down $6.50 or -0.38%.

Although gold is widely considered a hedge against higher inflation anticipated to be fueled by stimulus measures, higher yields have challenged that status this year. When yields rise, they increase the opportunity cost of holding bullion while making the U.S. Dollar a more attractive asset. Meanwhile, a stronger greenback then reduces foreign demand for dollar-denominated gold.

Treasury Yields Rise Slightly Ahead of Key Bond Auction

While bond auctions are normally uninteresting events, Wednesday’s auction of $38 billion in 10-year Treasury notes could move the gold, bond and stock markets.

The Treasury Department has printed roughly $3.6 trillion of new government debt in the past year to shore up the economy that was roiled by the COVID-19 pandemic.

Increased supply of government debt and weak demand in a February bond auction has pushed interest rates higher. The U.S. 10-year Treasury yield has flirted with the 1.6% level in recent weeks, pressuring gold prices.

Investors will be watching the 18:00 GMT bond auction for a signal as to where the bond market might be headed, which would also likely move gold.

Inflation May Have Been Warming Up in February, But It Could Be Hot by May

Inflation is just warming up, but by late spring it could get downright hot, even if temporarily.

February’s consumer price index, a measure of inflation, is expected to be up moderately when it is released Wednesday at 13:30 GMT. By May, the pace of headline consumer inflation on an annualized basis could be double February’s pace.

The debate in the market is whether the spike is transitory as the Fed and many economists say, or the start of a bigger trend.

“The big question to ask is will that level of heat we’re going to see by May be sustained or not?” said Barclay’s senior U.S. economist Blerina Uruci.

“I’m in the camp of people who think probably not, but there are some who think the opposite,” she said.

Economists expect the consumer price index rose 0.4% in February, or up 1.7% from a year ago. That compares to a 0.3% increase in January, and a 1.4% rise on an annual basis.

When energy and food are excluded, the core CPI is expected to be up 0.1% in February, or an annual pace of 1.3%.

Daily Forecast

The CPI report should drive the demand in the bond auction so the auction is the thing to watch today for a possible violent reaction in the gold market. If bond yields jump, gold could get crushed. If bond yields are stable, gold could breakout to the upside.

For a look at all of today’s economic events, check out our economic calendar.