Gold’s Renewed Momentum Hints Markets are Worried about US Inflation

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Gold’s renewed momentum was one of the most notable market events this week, sending price to a new 2020 high:

Gold’s Renewed Momentum

It looks like bulls and bears argued for two months about the direction as the price stalled in the range between key levels of $ 1680 – $ 1745. Finally, sellers capitulated. Last month, around May 18, a failed breakout took place – it is clear that the price failed to gain a foothold above the upper bound.

Now the chances that the breakout is successful are much greater. We can see that there was a rebound from the ex-resistance converting it into support. Also, higher low followed in the price action adding evidence to the truth of breakout. Such behavior tells us that the market has come to consensus about the validity of the breakthrough – sellers realized they made a mistake betting that resistance would hold, buyers became more confident that their decision to buy was right.

Breakout from a range is usually the signal of initiation of a trend. As the gold price quitted 2-month range, the base scenario is now bullish trend with next target at $ 1800.

The function of gold as protection from falling real interest rate suggests that the driver for the rally could be some upward shift in US inflation expectations. And indeed, one of the inflation expectation metrics (5y5y inflation swap) has risen to 1.62%, the highest level since mid-April:

Gold’s Renewed Momentum

The breakthrough in gold price (red curve) coincided with the acceleration of inflation expectations in the US.

The market can discount too much inflation risk in the United States, including because of the confidence of the key “expectations-setter” – the Fed, which is confident that the net effect of the coronacrisis and subsequent stimulus is disinflationary. However, data for May on the labor market, retail sales, real estate and car sales slowly prove the opposite.

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