The gold price has been hovering just under $1,800 an ounce as a plethora of factors provides both support and resistance. Tuesday’s CPI report indicated that inflation was a little less than the consensus expected in August, and the gold price shot higher immediately after the report. Meanwhile, the dollar index is falling, demonstrating that the dollar is one of the most critical factors driving gold right now.
Consumer prices were up 5.3% from last year and 0.3% from July, according to the U.S. Labor Department. A consensus estimate from Dow Jones suggested expectations of a 5.4% year-over-year increase and 0.4% month over month.
Removing food and energy prices, the CPI was up only 0.1% month over month and 4% year over year. Energy accounted for the bulk of the inflation increase in August, rising 25% year over year with a 42% increase in gas prices since last year. The Federal Reserve has said repeatedly that it believes the current inflation is only transitory, but the World Gold Council pointed out that it still is affecting consumers.
The council noted that gold ended August just slightly lower month over month on the back of marginal weakness in exchange-traded funds and firmer interest rates. The yellow metal was down 0.6% in U.S. dollars, bringing it to a 4% decline year to date. The global financial markets were fairly quiet in August, which isn’t unusual for August.
Green Shoots for Gold Despite August Weakness
The World Gold Council also pointed to green shoots for the gold price. Fed Chairman Jerome Powell said at the Jackson Hole summit toward the end of the month that there had been a “lack of substantial further progress,” which had a positive impact on the yellow metal. The gold price jumped 1.4% that day as it sounded like tapering could be pushed into next year.
The World Gold Council’s short-term model suggested that the slight pullback in the gold price in August mostly resulted from momentum factors driven by ETF outflows and a reversal of July’s strong return. On the other hand, the negative impact was cut by the follow-through from interest rate declines in July.
Gold-backed ETFs saw a decline of $1.3 billion in assets under management in August, although they had seen inflows in every month since April. The World Gold Council believes the outflows were primarily due to reduced investment demand in North America after the selloff in gold early in the month.
Gold In September
For those wondering when is a good time to buy gold, the World Gold Council said that historically, September had been a strong month for the yellow metal. The organization’s analysis shows that gold is usually in the green for September, with a confidence level of almost 90%. It added that two trends likely drive positive returns for gold during the month.
The first is robust demand related to the Indian wedding season and other October and early November festivals. The other is increased global investment activity after the summer months, which are usually quieter. In another report, the World Gold Council highlighted strength in another area that’s been driving gold this year. The organization said demand for gold jewelry in China rose 122% year over year to 338 tons in the first half of the year. However, the demand was in line with the first-half average between 2010 and 2019.
The World Gold Council noted that there are many ways for investors to add gold to their portfolio, including ETFs, bars and coins, options, futures and gold stocks. The method used depends on the investor’s needs, their time horizon goals and more. It might make sense to use multiple methods to gain exposure to gold.
Institutional Investors May Be Adding to Gold Positions
Another important factor driving the gold price is institutional interest, and there are signs that major institutions could be adding more of the yellow metal to their portfolios. The World Gold Council noted that representatives from institutional investors have been expressing support for gold more and more often, which suggests they may have been buyers over the last month.
For example, Mark Mobius of Mobius Capital Partners advised investors late last month to have 10% of their portfolio allocated to gold. He expects global currencies to devalue next year due to all the COVID-related stimulus and inflation. Gold has long been a store of value, and if inflation sticks around like some expect it to, demand for the yellow metal could increase, sending the price higher. The World Gold Council noted that fiat currencies’ purchasing power had fallen significantly in recent years.
Additionally, John Paulson, who famously shorted subprime housing mortgage bonds during the Global Financial Crisis, has been offering his investors the ability to settle their investments in gold instead of dollars. In response to a question about whether the yellow metal is a good investment right now, he said he believed that it was. He pointed out that there’s a limited amount of investable gold “in the order of several trillion dollars.”
Meanwhile, the total amount of financial assets sits at around $200 trillion. Thus, Paulson believes that as inflation picks up, investors will try to move out of fixed income and cash, with the logical place to go being gold. He expects inflation to go much higher than most are predicting, which would be extremely good for gold.
Breaking Through Key Resistance
After the inflation report on Tuesday, the gold price finally sliced through the resistance level at around $1,800 an ounce. However, the yellow metal did not have the momentum to hold above that important psychological level yet.
The good news is that the dollar index has declined, giving gold a foothold as the two assets jockey for position in portfolios as a safe-haven asset. In an email on Tuesday, Edward Moya of OANDA said that the inflation report removed the risk of the Fed announcing plans to taper at this month’s meeting.
“Treasury yields plunged, and that helped gold tentatively pierce the $1800 level,” he said. “This is a pivotal moment for gold, and if it can’t push higher as yields plunge, selling pressure could quickly return. CPI is decelerating, and that should be very good for gold in the short term as real interest rates go down. After the August CPI print, gold should have enough momentum to stabilize above $1800 by the end of [Tuesday], but if it doesn’t, it could get very ugly.”
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.