(Kitco News) Gold's narrative has shifted after the latest round of hot U.S. inflation data, according to MKS PAMP GROUP. And here's what to watch with the latest surge higher.
"There's a fundamental change from the previous 'thinking' (strong CPI = faster Fed tapering schedule = lower gold) to strong CPI = some fear, not an acceptance of inflation = higher gold," said MKS PAMP GROUP head of metals strategy Nicky Shiels.
The rally analysts have been waiting for is here — gold closed above $1,835 an ounce level on Wednesday. At the time of writing, December Comex gold futures were trading at $1,864.00, up 0.85% on the day after rising $35 this week.
The shift in the fundamentals came after the inflation rate in the U.S. accelerated to more than 30-year highs in October. "The price action through key technical inflection points when the CPI beat expectations handsomely – highlights a shift in narrative," Shiels pointed out.
This is supported by two other key drivers aside from the hotter-than-expected 6.2% October inflation number.
The first is that the Federal Reserve tapering announcement is now out of the way. And the second is the Fed's focus on reaching full employment while waiting inflation out, Shiels noted.
"Powell put the onus on labor & participation rate, buying time but at the expense of confidence in them waning (risk of a Fed policy error is rising)," she said.
This is just the start of the inflation trade for gold, which has been waiting on the sidelines for the past several months.
"Our core gold narrative – 'the stimulus peak is in ($2000+ in Aug' 20), the inflation peak is not yet in' – is starting to fill in," Shiels stated. "Gold is (was?) 'stuck' between the traditional thinking (Fed normalization) vs. the dynamics in inflation / real rates & structural drivers."
Also working in gold's favor is the fact that the yellow metal is quite cheap as an inflation hedge compared to alternative assets such as bitcoin.
"It is still a cheap, underweight, and much less volatile inflation hedge vs. cryptos/alternative assets," Shiels described. "The elephant in the room needs to be addressed - is Gold or crypto a better inflation hedge, a hugely polarizing debate? Correlations, which isn't necessarily causation, shows gold was an OK inflation hedge in 2020 (+0.42), while Crypto has been a better one in both years (+0.9)."
Watching gold's price chart is extremely important in the next few weeks as gold shifts from trading between $1,700-$1,850 to $1,830-$1,900. A close below the $1,835 an ounce level could indicate that the current rally is over, Shiels warned.
"Ten-year real rates hit a new record yesterday (30yr TIPS & real Fed funds also hit a record low), providing the fundamental support in allowing bullish momentum to be injected," she said. "We have yet to see full US$ depreciation, but that would be driving the next leg higher in Gold and other commodities."
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