Inflation reached its highest level in more than 30 years, and gold responded by bursting through the previous resistance level at $1,835 per ounce on Nov. 10. The October CPI number showed a 6.2% increase year over year.
Core inflation, which excludes energy and food, rose 4.6%, the fastest rate in 30 years. Food prices are up 5.3% year over year, marking the largest increase since January 2009, while gas prices rose 6.1%, the largest increase since March.
Inflation Isn’t Transitory
It’s looking more and more like the Federal Reserve is making or could make a policy mistake. The central bank has maintained that inflation is transitory, but October’s CPI print suggests that view is wrong. Analyst Edward Moya of OANDA said in an email that it could take a few more hotter-than-expected inflation reports before the Fed will reverse its view that the current inflation is merely transitory.
Analyst Ole Hansen of Saxo Bank noted that U.S. 10-year real yields supported gold’s rally, dropping to an all-time low at -1.25%. However, gold’s ability to move higher even though the dollar hit its highest level in 16 months has captured the market’s attention.
Hansen said it could be a sign that the market is finally waking up to the realization that inflation is a longer-term problem rather than a transitory one. As a result, gold has some catching up to do compared to current real yield levels.
Following the recent FOMC meeting, market watchers began to believe that the Fed would ignore the soaring inflation, instead focusing on the labor market. Moya said in an email that more than 4 million jobs still need to be filled for the economy to reach pre-pandemic levels. However, Hansen believes the October inflation read was hot enough that it will jolt the market and boost expectations for a Fed rate hike next year.
Where Will the Gold Price Go Now?
Gold had been range-bound below $1,800 an ounce for some time and hadn’t broken above $1,835 since July. According to Hansen, this fact supported a dislocation between falling real yields and range-bound gold. Although the dollar remains strong, he argues that gold has some catching up to do. Hansen believes that the gold price could top $1,900 an ounce with real yields around current levels.
For now, gold appears to be meeting some resistance at around $1,865 an ounce, as the price has gone up to that level a few times in trading on Thursday but kept failing to break through that level. Colin Cieszynski told Kitco News that he sees the gold price rising to $1,920 an ounce.
Hansen added that the excessively hot inflation read boosted the number of expected interest rate hikes of 25 basis points next year to two and a half. Meanwhile, long-end bond yields followed what Hansen described as a “disastrous” 30-year Treasury auction, which he added was sold “with the longest tail on record.”
The dollar also surged across the board, and the euro versus the dollar fell below the psychological level of 1.15 euros for the first time since July 2020. Additionally, Hansen pointed out that gold’s newfound strength and ability to climb despite the strong dollar helped the yellow metal reach a one-year high in euros at 1,625 euros an ounce.
Will Gold ETF Flows Reverse?
Hansen added that the market will now be watching gold-backed exchange-traded funds to see if the breakout in the gold price will trigger renewed interest after months of redemptions. Fund managers have been slashing their exposures to the yellow metal over the last year amid low volatility in the stock market and soaring equity prices, which Hansen said reduced the need for diversification.
The World Gold Council reported earlier this month that gold-backed ETFs saw net outflows of 25.5 tons in October. Global gold ETF holdings declined to 3,567 tons, amounting to $203 billion last month, to notch year-to-date lows.
However, the World Gold Council also pointed to a pickup in COMEX managed money net long positions in gold futures and signs of continued strength in vaulted physical gold, suggesting that some investors could have been shifting their gold ETF positions into physical exposure. This week’s hot inflation number could further increase this trend if the World Gold Council was right about it earlier this month.
Thanks to the fresh inflation worries, gold prices are trading at around five-month highs. Bob Haberkorn of RJO Futures told Kitco News that inflation is here to stay and that it’s only going to get worse. He also said that if gold would rally, it would be because of the new inflation fear.
“Inflation hitting a 30-year high was music to gold traders’ ears,” Moya said in his email. “The way the gold trade is unfolding is looking mostly bullish. The labor market recovery will likely take longer than a few months for the Fed to say mission accomplished on maximum employment, and pricing pressures will continue to trigger inflation-hedges into bullion. If the Fed makes a policy mistake and has to quickly hike rates and send the economy into a recession, that should be an environment where gold outperforms equities.”
He expects gold momentum to remain in place if real yields keep declining, but gold isn’t the only inflation hedge. Analysts are also pointing to price action in bitcoin as a sign that investors are also turning to the cryptocurrency as an inflation hedge.
“Bitcoin continues to show Wall Street that it is a bona fide inflation hedge,” Moya said. “After the hottest inflation reading in 30 years, bitcoin shrugged off a knee-jerk dip and pushed higher into uncharted territory. This inflation report has many thinking pricing pressures won’t be easing just yet, and that should be good for inflation hedges.”
However, the price action in Bitcoin isn’t as strong as gold prices have gotten since the hot inflation read. Moya sees a price barrier at $70,000 for bitcoin, and he expects that level to continue to provide resistance.
Moya sees a mixed short-term outlook for the cryptocurrency. Still, since most of the last part of the recent rally was institutional, he expects end-of-year volatility to remain elevated. Moya puts the end-of-year trading range for bitcoin between $65,000 and $75,000.
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.