Gold prices test the strong support at $1700

Market participants are still digesting the financial shockwaves resulting from yesterday’s CPI report. The inflation report revealed that inflationary pressures for goods and services said that inflation is running at a scorching level of 9.1% year on year. Many have never lived through a time in which inflation was this elevated because this is the highest level of inflation since November 1981.

Another ominous sign that the cost of living will remain elevated is today’s release of the PPI (Producer Price Index). Today the US Bureau of Labor Statistics released its producer price index data. The report revealed that the PPI increased 1.1% when compared to last month and increased 11.3% year on year. This is the largest increase recorded since March 2022 when the PPI came in at 11.6% year on year.

The PPI measures the average change over time in the prices domestic producers receive for their output. Simply put, it is a measure of inflation at the wholesale level. Therefore, it means that there is a small-time lag between when the end product reaches the consumer market and therefore impacts purchases in the future.

This level of inflation will almost certainly force the Federal Reserve’s hand and push its already aggressive stance on inflation to an ultra-aggressive stance. This significantly alters where interest rates will be by the end of the year. Members of the Federal Reserve have made statements in the last 24 hours indicating that they will most likely raise rates by a full percentage point during the July FOMC meeting. Furthermore, it is likely that they will maintain this new extremely aggressive monetary policy when the FOMC meets again in September. The Fed is widely expected to follow this month’s 1% rate hike with another three-quarters of a percent hike in September.

Regardless of the size of the rate hikes at the remaining four FOMC meetings, it is extremely likely that fed funds rates will have moved from 0 to 25 basis points before the March FOMC meeting to at least 3 ½% to three and three-quarter percent by the end of the year.

Gold pricing will remain under pressure through this period because the dollar will strengthen as interest rates move higher and there is a 100% negative correlation between the value of the dollar and gold prices. This is because the dollar is paired against gold and therefore a direct correlation between dollar strength in gold weakness or dollar weakness in gold strength.

Downward price pressures have been rising in gold as the U.S. dollar index continues to trade at 20-year highs, yields advance.

A break below $1,700 is still very likely, with the next support level at $1,680 an ounce. But once the peak is in place and we see signs of inflation pressures retreating, we could see gold back in favor as the economy drifts into recession.”

Analyzed by: Mr. Chhea Chhayheng Business Manager of PP Link Securities

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