Gold Price Analysis: XAU/USD consolidates close to Tuesday highs around $1815

Spot gold (XAU/USD) prices saw significant upside on Tuesday, rallying more than 2% from roughly $1780 to current levels around $1815.

Global PMI reports suggest inflation incoming

The US 10-year inflation breakeven rose above 1.8% on Tuesday (an indication that markets expect inflation to average 1.8% over the next 10 years), its highest level since May 2019. Meanwhile, PMI reports from around the world on Tuesday also pointed to the likelihood of rising inflation;

China’s Caixin PMI survey said that “inflationary pressures grew as prices rose at a faster pace” and South Korea’s PMI report said that “the rise in average cost burdens was strong overall, which panel members associated with widespread increases in raw material prices. Higher supplier costs were partially passed on to customers resulting in a further, albeit marginal, rise in output charges”. Meanwhile, Tuesday’s European morning session final manufacturing PMIs out of the Eurozone said “shortages of inputs are meanwhile contributing to higher price pressures, with suppliers' increasingly able to raise prices amid sellers' market for many key inputs. Such restoration of pricing power bodes well for profits & helps ease broader deflationary concerns” and the UK report said "input cost inflation accelerated to a 2-yr high in November. Companies responded by raising their average selling prices to the greatest extent in the year so far”.

Market’s seem to have sensed the smell of higher incoming inflation in the air; US treasury yields shot higher on Tuesday (10-year bond yields rising roughly 8bps to 0.921%) and the curve steepened (the 2-year 10-year bond yield spread widened by just under 6bps).

However, with Fed officials continuing to signal rates at zero until at least 2023 and a continuation of accommodative policy into the foreseeable future, the chances are that US bond yields will not rise as much as inflation expectations, meaning that US real-yields are likely to remain well below 0.0%.

As many analysts have pointed out over recent weeks, the subdued real rate environment and the fact that real rates are expected to remain at lows for the foreseeable future boosts the attractiveness of precious metals as an alternative investment to fixed income. Likely, this narrative was one of the key reasons why precious metal bulls were able to regain control on Tuesday, as well as those more enticed to buy precious metals at favourable prices compared to recent months.

Whether Tuesday’s move to the upside signals a resumption of the precious metals bull market is one thing, but the low real rate narrative is likely to continue to offer support to the complex for the foreseeable future.

XAU/USD gains capped by last Wednesday/Thursday highs

XAU/USD’s gains on Tuesday were capped at last Wednesday and Thursday’s highs around the $1818 mark. If this level is to go, gold prices would have a clean run back towards the next significant area of resistance around $1850, an area which coincides with mid-September and early November lows.

If the bulls lose steam, however, the pair is likely to revert lower back towards support around the $1800 mark, which also coincides with the 200-day moving average. Below that, $1765 is a significant area of support; not only is it Monday’s lows, but was also the high back on 18 May.

XAU/USD four hour chart