Risk of Significant Reversal in Gold Price Rise as Inflation Report Looms, Says TD Securities

(Kitco News) The strong jobs report proved that the US economy is still expanding despite two consecutive negative quarterly GDP releases. And for gold, that means higher prices could be in jeopardy, according to TD Securities.

In reaction to the creation of 528,000 jobs in the US economy in July, gold lost 1% on Friday. The July report more than doubled economists’ expectations for 250,000 more jobs. On Monday, gold saw a rally, with December Comex gold futures rising to $1,793.00, up 0.70% on the day.

Friday’s selloff was led by a shift in sentiment that markets were premature to price in a Federal Reserve pivot from the aggressive tightening cycle, said Bart Melek, head of commodities strategy at Securities Securities. TD.

“The 528,000 increase in payrolls, the drop in unemployment to just 3.5%, and the outsized 5.2% year-over-year jump in profit growth all suggest that the US economy is expanding, despite two consecutive quarterly declines in GDP,” Melek said on Friday. “This, along with the strength of the service sector and given that the American consumer has larger than normal cash holdings in checking accounts and money market funds, which stand at about three trillion dollars, all This suggests that there are a lot of inflationary pressures in the system.”

The focus this week will be on the July inflation report in the US, with economists forecasting the annual pace of inflation to come in at 8.7% after hitting 9.1% in June. .

According to Melek, inflation will continue to be stubbornly high, and the measure to watch would be the core inflation figure, which excludes the food and energy sectors. “The core CPI could continue to rise, even if lower energy prices lower the overall level,” he said. “U.S. July CPI data next week, particularly the core, will be the ones to watch as any hint of stubborn inflationary pressures in the system should help debunk the early pivot argument.”

Consensus calls from economists expect the annual core inflation figure to accelerate to 6.1% after hitting 5.9% in June.

24 hour live gold chart [Kitco Inc.]

For gold, that could mean a significant reversal of the move that took prices from below $1,700 to near $1,800, Melek pointed out, citing reduced exposure to the precious metal.

“There is a strong likelihood that the recent rally, which took prices from a July low of $1,681 per ounce to a high near $1,795 per ounce, will be broadly reversed as the fund managers are reducing recently acquired long exposure,” he said. “The combination of hawkish statements from Fed officials and stronger than expected data are the likely catalysts that may trigger additional selling in the days and weeks ahead.”

The Fed’s hawkish speakers last week pushed back on the idea of ​​the US central bank forgoing rate hikes.

Chicago Fed President Charles Evans said the U.S. central bank would likely continue to use oversized rate hikes until it sees inflation come down. “If you really thought things weren’t getting better… 50 (basis points) is a reasonable estimate, but 75 could also be fine. I doubt more is needed,” he told reporters on Tuesday. .

San Francisco Fed President Mary Daly said inflation remained a problem. The Fed has “a long way to go” before achieving its price stability goals, Daily said in a LinkedIn interview. “We are still resolute and completely united,” she said.

St. Louis Federal Reserve Chairman James Bullard also noted that “we still have some way to go here to get to tight monetary policy.”

On top of that, Richmond Federal Reserve Chairman Thomas Barkin admitted that the Fed was willing to pay the price to get inflation under control. “There is a way to get inflation under control. But a recession could come in the process. If that’s the case, we have to keep that in perspective: nobody canceled the business cycle,” he said. .

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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