Gold continues to trade close to its lowest level for 3 years, although it is in recovery mode today, attempts to get above $1,260 have been futile in the last few sessions. While $1,200 appears to be decent support for now, there is a nagging fundamental concern that continues to keep me nervous about the outlook for gold: inflation expectations in the US.

There are two charts that are worth watching: The University of Michigan/Thomson Reuters measure of consumer inflation expectations for the year ahead, which fell further last month and are close to its lowest level in 11 months. Added to this, the Federal Reserve Bank of Atlanta’s 5-year deflation probabilities report from last week may have ticked down from 13% to 12%, but it remains close to its lowest levels since November 2012, before the rallies started in the stock market and in the USD.

One of the key drivers of gold is its status as an inflation hedge, thus, this data further erodes the attractiveness of the yellow metal.

So what’s new about falling inflation?

But what is new about falling prices in the US? CPI inflation has been falling steadily after reaching a high of 3.9% in late 2011. Since February, US CPI has been below the Federal Reserve’s 2% target rate. Likewise, consumer inflation expectations have been heading south since peaking in May 2011.

However, in the last few weeks something new has happened: Treasury yields have risen at their fastest pace since 1987 and the 10-year yield is close to 2.7%, while the 30-year mortgage rate is at 4.7%, both the highest levels for nearly 2 years. Added to this, the Fed may start tapering its QE3 programme as early as September, which could keep upward pressure on interest rates in the medium-term.

Rising rates tends to keep the consumer subdued, which could keep inflation expectations under wraps for some time; it could also keep the probability of deflation firmly on the horizon.

Technical outlook

This keeps us sceptical on any recovery in the gold price in the near term and why we think that a move higher could be met with a wall of selling pressure.

In the short term, any move back to $1,270 (last week’s high) and then $1,310 – the high from 24th June, could thwart the upside.

Figure 1: Consumer inflation expectations


Source: University of Michigan/Thomson Reuters

Figure 2: Deflation expectations


Source: Federal Reserve Bank of Atlanta

This material is published by Minerva Analysis LTD for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified and Minerva Analysis LTD makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of Minerva Analysis’ employees, as of this date and are subject to change without notice. We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Past performance is not a reliable indicator of future results.

Feed news

Latest Forex Analysis

Latest Forex Analysis

Editors’ Picks

EUR/USD climbs above 1.1250 as investors eye coronavirus headlines

EUR/USD preserved its recovery momentum early Friday and rose above 1.1250 during the European trading hours. Markets are doubting the Fed's policy tightening prospects as the new coronavirus variant revives concerns over the economic recovery losing steam.


GBP/USD rebounds toward mid-1.3300s on broad dollar weakness

GBP/USD reversed its direction after dipping below 1.3300 earlier in the day and started to push higher toward 1.3350. The greenback is facing heavy selling pressure amid the sharp decline witnessed in the 10-year US Treasury bond yield.


Gold clings to strong gains above $1,800 as US T-bond yields plunge Premium

Gold staged a decisive rebound on Friday and reclaimed $1,800. The intense flight to safety is causing US Treasury bond yields to fall sharply and fueling XAU/USD's rally. Investors await news on vaccines' effectiveness against the new COVID variant.

Gold News

Cardano could tank to $1 if ADA fails to defend crucial support

Cardano price is currently hovering below a freshly shattered 6-hour demand zone, ranging from $1.68 to $1.79. This resulting crash could extend to the immediate and critical foothold at $1.40. 

Read more

Black Friday 2021 Discounts!

Do you want to take your trading skills to the next level? Now you have a chance of leaping forward at attractive introductory rates. For Black Friday, FXStreet is offering discounts of up to 50% on its upgraded Premium plans. 

Subscribe now!