CPI surge, inflation rose as gold firmed

The data released from Labor Department showed that CPI rose for the 17^th month in October, increased 6.2% on a year-over-year basis, the highest level in 31 years. Core inflation, stripping out food and energy, increased 4.6%, beating expectations of 4.3% and continuing to set a new record since the outbreak of Covid-19.

In the face surprising inflation data, the financial market also reacted strongly, the VIX jumped close to 20, the three major US stock indexes that kept hitting new highs fell sharply, the dollar index soared to nearly 100 bps overnight, the US treasury yields soared, and the 5-Year Breakeven Inflation Rate hit 3.1%, the highest since 2002. Crypto currency intraday hit an all-time high again, and gold jumped more than $40......All kinds of rare records burst out.

Dollar surged with gold

It is fair to say that the high inflation data has not only renewed doubts about the credibility of the theory that inflation to be transitory, but also sparked speculation that the Fed may raise interest rates sooner than expected. So what we have seen is an unusual phenomenon: gold rose almost in tandem with the dollar index, breaking the negative relationship between the two.

Dollar surged, if only on the basis of rate hike anticipation builds, but gold rally is counterintuitive. Gold has almost fallen lopsided and moved almost in the opposite direction of the dollar after the release of stronger than expected CPI data this year, as high inflation could lead to tighter monetary policy. But this time gold bears seem to have no resistance, there is no too much entanglement in disk surface, gold even rose above 1860. It is clear that high inflation has sparked fears and riots, and that gold is playing a key role in hedging against inflation.

In fact, since the Fed announced to start tapering its bound purchases in November, which should be a signal of tighter policy, but gold has not been affected by the announcement and has staged an unusually strong rally. Shows that the market has fully digested the tapering in the early days and is now completely indifferent to it. As for the continuity of inflation, the Fed can be described as obsessively confident. The Fed has repeatedly made it clear that it is still premature to start talking about rate increases, at least until June next year, so the expected impact of rate hikes on gold at least at this stage is also minimal.

How does inflation affect gold?

Gold surged this time which also easily broke through a key resistance at 1832 and occurred as the dollar was moving higher, has also led several investment institutions to raise their expectations for the future movement of gold.

Citi lifted its zero- to three-month gold price target by 11% to $1,900 an ounce. David Meger, director of metals trading at High Ridge Futures. He said, gold being the quintessential hedge against inflation, they believe inflation is the underlying positive environment that will foster the gold market rally in the weeks and months ahead. So what is the possible movement next for gold?

Gold itself has two main characteristics, it is both a typical hedge against inflation and very sensitive to interest rates, but when interest rate hike expectations rise and inflation spikes at the same time, many investors become confused.

Over the long term, the price of gold actually depends on the U.S. real interest rate, which is the yield of Treasury Inflation-Protected Security (TIPS), the difference between the treasury yields and the expected inflation rate for the same maturity. When the U.S. real interest rate rises, the price of gold falls; when the U.S. real interest rate falls, the price of gold rises.

Looking at just the last decade, gold has maintained a near-perfect inverse relationship with the yield of 10-year TIPS, with few exceptions.

In October, when CPI exceeded 6%, the U.S. bond yields collectively soared, as did the breakeven inflation rate, which represents inflation expectations, while the U.S. real interest rate, which represents the yield of TIPS, fell further. The 10-year TIPS yield fell as low as -1.243%, while the 30-year yield fell to -0.608%, both record lows.

Aside from the Fed's 0-0.25% nominal interest rate, real interest rates fell into negative, indicating that treasury yields, anchor of the global asset pricing, have run down inflation expectations and inflation is becoming more and more serious. As long as the Fed continues "printing money" in short-term, the U.S. real interest rates are likely to remain negative, and gold still has room to rise.

In terms of technical charts, gold broke through the key pressure level of 1832 after the early flag consolidation, and the next primary target are expected near 1900.