Daily Market Recap – Gold prices benefit from rising inflation outlook

The price of gold continues to rebound, regaining its mid-September level of about $1800, thanks to rising investor inflation expectations. Indeed, the famous “breakeven” inflation expectations have been rising since the last FOMC meeting at the end of September, with five-year expectations rising from about 2.40% to 2.95%. Longer-term inflation expectations have also risen, but to a lesser extent than short-term expectations.

At the same time, the yield curve continued to flatten, with short rates jumping in anticipation of faster Fed policy normalization, while long rates moved up and down, but are finally unchanged from last month.

As a result, long-term real rates (nominal rates - inflation outlook) have fallen sharply in recent weeks. The US 10-year real rate went from -0.82% at the end of September to -0.98% last Friday, which obviously benefited gold and other precious metals, known to be a shield against the loss of purchasing power.

However, it is difficult to imagine real rates falling further. This would require inflation expectations to rise further or nominal rates to fall. Much will depend on what happens to commodity prices, if they resume their surge, and on the FOMC's rhetoric next week after its meeting.

Fed officials have underestimated inflation, for now, perhaps to avoid the fear of hyperinflation. If the Fed is able to allay fears, it should lead to a rebound in real rates and thus a decline in the price of gold.

In any case, with real bond yields at their lowest, it is hard to imagine them going lower and thus envisage a real bullish potential for gold.

From a technical perspective, the short-term trend in gold prices has been bullish since the beginning of the month, but the long-term outlook remains bearish. The lows have been the same since the beginning of the year ($1676), but the highs are getting lower and lower, which indicates a fragility of the buyers.

(Chart Source: Tradingview 27.10.2021)

A return to the July and August highs at $1835 would be a technically interesting price level to look for a downward position (in view of a rebound in real rates). If this resistance is breached, which I think is unlikely for the reasons given, a move up to $1916 would be technically justifiable.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.