Heading into tonight’s crucial CPI data, gold is trading lower for a fourth consecutive week and is down around 8% from its April 18 high at $1999.

After peaking at $2,070 in early March following Russia’s invasion of Ukraine, gold’s decline accelerated in mid-April after a flood of hawkish Fed chairs raised expectations of a more aggressive up cycle.

Although there was initial relief after the May FOMC that Fed Chairman Powell played down the possibility of a 75bp rate hike, he pre-flagged two anti-inflation rate hikes. by 50 bps at the next FOMC meetings in June and July.

The Fed’s more aggressive super-tightening cycle, which is expected to bring the Feds Fund target above 3% by the start of the year, has undermined the value of gold for two main reasons described below. -below.

Inflation peak

Gold is considered an inflation hedge to protect against the depreciation of fiat currencies. As can be seen from the chart below, inflation and gold have been rising in tandem until recently.

Gold fell, likely anticipating a slowdown in inflation as of tonight’s US CPI print. Headline inflation for April is expected to slow to an annual rate of 8.1% from a 40-year high of 8.5% in March. The underlying inflation rate should fall from 6.5% to 6%.

Positive U.S. real returns

In late November, the renomination of Fed Chairman Powell at the expense of Fed Governor Lael Brainard was seen as a hawkish development and the catalyst for real yields to move away from the deeply negative levels of early November (-117 bps) .

Overnight, US 10-year real yields (the inflation-adjusted interest rate) closed at +30 points. Of note, gold’s bearish momentum accelerated in mid-April as real yields rose from negative into positive territory.

A positive real return saps demand for gold because gold earns nothing. Real yields should continue to rise as the Fed maintains its hawkish stance.

What do the graphs say?

In a March 18 post here, we described the reversal pattern from the $2070 high as “tweezers/double top that could prove to be one for the ages.” It is also notable that gold has completed a five-wave Elliott Wave advance from the 2015 low of $1046.

The ensuing pullback saw gold slide towards weekly uptrend support near $1830/$20. This level is likely to provide initial support. However, if gold experiences a sustained break below $1,820, the risks are for a deeper pullback to the year-end lows of the $1,700/$1,670 range.

Source Tradingview. Figures shown are as of May 11, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and should not be deemed to contain financial product advice or financial product recommendations.