The gold price experienced a subtle shift as Wednesday’s trading session began, coinciding with the US Dollar’s consolidation following Monday’s decline and in anticipation of the US CPI data later today.
Contributing to the pressure on the precious metal is the persistent ascent of US real yields. From a broader perspective, the trajectory of real yields may appear unidirectional at the moment.
Should today’s US CPI figure fall short of expectations, it could trigger a decline in long-term inflation expectations, thereby bolstering real yields.
Conversely, if today’s US CPI figure surpasses estimates, it might raise concerns about a more restrictive monetary policy from the Federal Reserve at the upcoming Federal Open Market Committee (FOMC) meeting next week.
Such a scenario could lead to a rise in the back end of the Treasury yield curve, potentially reinforcing real yields, particularly in the closely monitored 10-year segment of the curve.
According to a Bloomberg survey of economists, the headline CPI is expected to register a year-on-year increase of 3.6% through the end of August, with the core reading reaching 4.3%.
Taking a glance at the chart below, it becomes evident that energy plays a significant role in the CPI equation. While crude oil remained relatively stable in August, it has witnessed a notable surge in September.
US real yields have been on an upward trajectory for much of 2023, recently reaching a 14-year peak at the 10-year point of the curve, exceeding 1.95%.
Real yield, which represents the nominal yield minus the market-derived inflation rate from Treasury inflation-protected securities (TIPS) of the same maturity, is regarded by the market as the actual return on an investment, factoring in the time value of money affected by price fluctuations due to inflation or deflation.
Upon closer examination of the elements contributing to the real return, it becomes apparent that nominal yields have been the primary driver behind the increase in real yields, with market-based inflation expectations holding steady around 2.3%, slightly above the Fed’s 2% CPI target.
The last instance of real yields reaching these levels occurred in 2009 when spot gold was priced below $1,000. In a more recent example, in 2018, when real yields hovered around 1.0%, spot gold traded below $1,300 per ounce.
Naturally, the dynamics of gold demand have evolved due to factors such as a global pandemic and geopolitical events.
Looking ahead, a potential break from the recent range between $1,885 and $1,900 could serve as a catalyst for a significant movement in XAU/USD. For more insights on range trading, click on the banner below.
As of now, the gold price seems entrenched within this range, having traded between $1,885 and $1,897 for the past six months.
Potential support levels may emerge in the $1,885 to $1,895 range, marked by previous lows, a breakpoint, and the 38.2% Fibonacci Retracement level spanning from $1,614 to $2,062. Further support could materialize around the 50% Fibonacci Retracement level at $1,838.
On the upside, resistance could be encountered at recent peaks of $1,953 and $1,897, or at the psychological level of $2,000, where a breakpoint also resides in close proximity.