Gold Price Analysis: XAU/USD eyes test of $1850 following firmer than expected US inflation

• XAU/USD prices have ticked up in recent trade into the $1840s, seemingly helped by higher-than-expected US inflation numbers.
• XAU/USD trades a few dollars higher on the day now, but is still well off Tuesday’s $1875 highs.

Spot gold (XAU/USD) prices have been on the front foot in recent trade, with a boost coming at 13:30GMT in the form of slightly softer than expected US Consumer Price Inflation numbers. Gold popped above the $1840 level and Wednesday Asia session highs at $1842, but has so far failed to break above $1850. As things stand, the precious metal trades with gains of close to $8 or 0.5% on the day.

Higher inflation expectations keep gold underpinned

US Consumer Price Inflation numbers for November came in a little higher than expected on Thursday; the headline index rose at a MoM rate of 0.2% versus expectations for a 0.1% rise, leaving the annual rate of inflation at 1.2% versus expectations for a drop to 1.1%. Meanwhile, the core index rose at a rate of 0.2% versus expectations for a 0.1% MoM increase while the YoY rate of core inflation was 1.6%.

This small beat on expectations seems to have been enough to give gold a mild boost, given that precious metals are seen as a hedge against inflation. But it is worth noting that inflation in the US remains well below the Fed’s target of 2%. Indeed, that is a target for Core PCE inflation of 2%, not for CPI and CPI is typically around 0.4% higher than Core PCE. That means that with the annual rate of headline CPI currently at 1.2%, it is roughly 1.2% where the Fed would like to see it. Moreover, with the Fed having recently pivoted towards a new policy of average inflation targeting, which in the practical sense means the Fed will allow CPI inflation to rise above 2.4% for a time to make up for past period of below-target inflation, inflation remains a long way off where it needs to be (in the eyes of the Fed anyway).

Though inflation conditions in the US are currently soft, inflation expectations have been picking up in recent weeks. 10-year breakeven inflation expectations on the US 10-year bonds have risen from below 1.7% in early November to just below 1.9%, its highest level since 2019 (meaning markets expect CPI to average 1.9% over the coming 10 years). Meanwhile, the ECB just announced more monetary stimulus in the form of a EUR 500B extension to the PEPP and more TLTROs, which seems likely to keep Eurozone inflation expectations supported close to summer highs.

In other words, market expectations for higher levels of inflation ahead are growing. This is keeping US real yields subdued; the 10-year TIPs Treasury bond yield fell to lows of -1.0% on Thursday, its lowest level since the start of October. Negative real yields on bonds, compared to a real yield of zero on gold makes the precious metal an attractive alternative.

XAU/USD testing key resistance

XAU/USD is currently testing a key area of resistance at the $1850 level, which corresponds to September and early November lows, as well as the 4 December highs. A break back above this level is likely to reopen the prospect for a push back towards Tuesday’s highs in the $1870s. Should the bulls fail, price action might well drop back into the $1820s towards Wednesday and Monday lows.