(Kitco News) The new U.S. inflation data release has triggered a rollercoaster ride in gold, with the latest move taking the precious metal nearly $40 higher on the day.
September's inflation numbers showed price pressures accelerating to 5.4% annually, slightly more than the market was expecting.
"We are starting to see the market growing nervous about the U.S. consumer. After digesting this report, it shows that the market is now anticipating sooner rate hikes. At the same time, we see the yield curve flattening, and that is good news for gold," OANDA senior market analyst Edward Moya told Kitco News. "Gold is entering a period where risks now outweigh the reopening trade, and we'll see more safe-haven flows into gold. This is a major reversal of trends and very positive for gold."
More persistent inflation could mean a more aggressive Federal Reserve when it comes to tightening. "Potentially, gold will no longer see significant weakness whenever we get more inflationary pressures because now inflationary pressures will mean growth concerns," Moya said.
And an environment of higher inflation and lower growth is known as stagflation, which is when gold is known to thrive, said Blue Line Futures chief market strategist Phillip Streible.
"The IMF is continuing to downgrade global growth and rising inflation, and that is the stagflation environment that gold thrives so well on," he said. "The inflation data reaffirms the Fed's position on tapering this November."
Moya pointed out that a more persistent inflation pressure guarantees that the Fed will begin its tapering in November, and it could be more aggressive than what Fed Chair Jerome Powell had described a month ago.
"Initially, Powell highlighted that tapering will be completed by the middle of next year. Now, expectations are that it will be done sooner, before we get to hot summer months," he said.
This reset in Fed rate hike expectations "is a game-changer" for gold, Moya highlighted. And if growth concerns continue to rise, gold has a chance to re-test those all-time highs of above $2,000 an ounce seen over a year ago.
Moya is bullish on gold after December futures surged 2% higher on Wednesday. At the time of writing, December futures were trading at $1,796, up nearly $37 on the day.
"Gold right now is facing massive resistance at $1,800; we'll test this level a handful of times. But I am still looking for further momentum. We'll see prices continue to move towards $1,840, which is where prices will consolidate more," he said.
Streible noted that he first needs to see what gold does at $1,800 an ounce, stating that he is using this time to lighten some of his overweight positions.
"Even if gold broke through that 50-day moving average, now it has $1,800 as psychological resistance, then there's $1,825-35 and then $1,850," he said. "Tapering could mark a bottom in gold."
The markets are closely watching the release of the Fed's minutes from its September meeting this afternoon. And this massive reset in Fed rate hike expectations following the inflation report could be what gold needs, Moya said.
"There's now over 90% chance that the Fed will raise rates by September 2022. There's uncertainty with the global energy crisis and the potential that Biden will make an announcement on China. Investors are scrambling for safe-haven positions," he told Kitco News.
Investors are looking for signs from the Fed that it is leaning towards the idea that inflation is more persistent than transitory, which will continue to drive rate expectations hikes, Moya added.
"Fed has done everything it can on the employment front. Even if we start to see sluggish job growth, with infrastructure spending, you'll see stable hiring in the first half of the year. This could allow gold prices to rally because the market will become more fixated on the inflation side of things," he explained.