Price of Gold Fundamental Daily Forecast – Gold Bulls Reaping Benefits of Listening to Fed

Gold futures are inching higher early Tuesday, extending its gains for the week, while reaching their highest level since February 1, as the rise in Treasury yields stalled, the U.S. Dollar weakened and inflationary concerns jumped, bolstering the precious metal’s appeal as an inflation hedge.

At 08:11 GMT, June Comex gold futures are trading $1869.20, up $1.60 or +0.09%.

Treasury Yields Flat to Start the Week

Treasurys are trading mostly flat for a second session on Tuesday, as investors appeared to take a breather after last week’s hotter-than-expected inflation prints caused some investors to dump U.S. government debt.

The yield on the benchmark 10-year Treasury note rose to 1.64%, while the yield on the 30-year Treasury bond dipped to 2.354%.

Jump in US Consumer Inflation Underpinning Gold

Data last week showed the Consumer Price Index (CPI) jumped 4.2% from a year earlier in April, the fastest rate since 2008. The larger-than-expected rise in inflation intensified fears that the Federal Reserve could be forced to start tapering its easy monetary policy if the U.S. economy heats up too quickly.

The central bank has said it expects inflation to climb this year as a reopening of the U.S. economy and a reduction of COVID-19 cases rekindles demand for travel, dining and a variety of other goods and services.

But Fed officials have said they anticipate the 2021 rise to be transient and to fall short of its new goal of averaging 2% over time. The central bank wants to see prices rise faster than 2% for some time to make up for periods of lower inflation before making significant changes to monetary policy.

Dallas Fed President Kaplan Reiterates His Dovish View on Interest Rates

Gold was further supported after Dallas Fed President Robert Kaplan on Monday reiterated his view that he does not expect interest rates to rise until next year.

Kaplan said that he still thinks it is possible the U.S. central bank could raise interest rates before the end of 2022, reaffirming the projection he made during the March policy-setting meeting.

“I haven’t seen anything from that point to today that’s changed my view,” Kaplan said during a virtual town hall conversation organized by the bank.

The U.S. labor market has a “good chance” of being at full employment by then and of having inflation at the central bank’s 2% target, Kaplan said.

Daily Outlook

Although the jump in inflation is providing some support, I think the main driver of the rally is that gold investors believe the Fed when it says it is going to hold policy accommodative. Additionally, the Fed is going to let investors know when they are going to make a move. This is providing a level of insurance for gold bulls.

Kaplan repeated his view that he would support trimming back the central bank’s asset purchases sooner rather than later, and said the Fed would want to “telegraph” those plans in advance to give the market plenty of notice.

The Fed will monitory inflation closely and will do what it can to ensure that consumers’ inflation expectations remain anchored near the central bank’s 2% target, Kaplan said.

“I don’t think people listening should doubt the Fed’s commitment to achieve that,” he said.

Conclusion:  “Don’t fight the Fed.” That saying seems to be paying off for bullish gold investors.