- Gold climbed above $3,400 for the first time since July 23.
- Gold futures rallied to a new record-high early Friday.
- July inflation data from the US could trigger a big reaction.
After fluctuating in a relatively tight range in the first half of the week, Gold (XAU/USD) gained traction and climbed to a two-week high above $3,400 before correcting lower toward the end of the week. July inflation data from the United States (US) and the action in Gold futures could influence XAU/USD’s performance in the short term.
Gold climbs above $3,400 area in choppy week
Gold edged slightly higher on Monday as US Treasury bond yields continued to push lower after declining sharply on disappointing labor market data the previous Friday. Later in the American session, US President Donald Trump announced that he will raise the tariff rate on Indian imports “substantially.” This development caused markets to adopt a cautious stance and helped Gold hold its ground.
The data from the US showed on Tuesday that the Institute for Supply Management’s (ISM) Services Purchasing Managers Index (PMI) declined to 50.1 in July from 50.8 in June. The Employment Index of the PMI survey dropped to 46.4 from 47.2 in the same period, while the Prices Paid Index, the inflation component, rose to 69.9 from 67.5. As the US Dollar (USD) struggled to stay resilient against its rivals after the PMI report, XAU/USD registered small gains on Tuesday.
In the American session on Wednesday, safe-haven flows returned to markets as Trump announced new tariffs and delivered threats. Trump issued an executive order imposing an additional 25% tariff on Indian imports and said that he could impose an extra 25% tariff on Chinese goods over China’s purchases of Russian Oil. Additionally, he noted that he might impose a 100% tariff on semiconductors and chips not built in the US, and threatened an extra 15% tariff on all Japanese imports. Gold benefited from risk aversion and climbed to the $3,400 area in the European session on Thursday.
Early Friday, Gold climbed to its highest level in two weeks near $3,410. Citing a so-called ruling letter issued by the US Customs Border Protection, the Financial Times reported that one-kilo and 100-ounce Gold bars will be classified under a customs code that won’t allow them to be exempt from tariffs imposed on the exporting country. “One-kilo bars are the most common form traded on Comex, the world’s largest gold futures market, and comprise the bulk of Switzerland’s bullion exports to the US,” the news outlet noted. Following this development, US Gold futures for December delivery hit a new record-high above $3,530 before retreating sharply below $3,500. In turn, XAU/USD turned south and declined below $3,400.
December delivery Gold Comex Futures vs. Gold spot. Source: Tradingview
Gold investors await US inflation data
The US Bureau of Labor Statistics will publish the Consumer Price Index (CPI) data for July on Tuesday. Investors expect the headline annual CPI inflation to edge higher to 2.8% from 2.7% in June and see the core CPI rising 0.3% on a monthly basis. Markets are largely convinced that the Federal Reserve (Fed) will cut the policy rate by 25 basis points (bps) in September.
San Francisco Fed President Mary Daly said recently that the Fed still has some ground to cover on its fight with inflation pressures, and cautioned against the US central bank acting too soon without having the full picture. Meanwhile, Atlanta Fed President Raphael Bostic warned that rising price pressures over the next six to twelve months could intensify the Fed’s challenges.
Hence, a significant upside surprise in the headline CPI reading and/or the monthly core print could cause investors to reassess the possibility of a Fed policy hold in September. In this scenario, US Treasury bond yields could turn north and support the USD, putting XAU/USD under bearish pressure.
Later in the week, July Retail Sales data will be featured in the US economic calendar. A negative print could hint at cooling consumer activity and weigh on the USD with the immediate reaction.
In the meantime, market participants will keep a close eye on the action in Gold futures. In case Gold futures remain well above spot prices, market participants could see that as an opportunity to purchase Gold to sell in the futures market. In this scenario, Gold demand is likely to remain strong and support spot prices.
Gold technical analysis
The Relative Strength Index (RSI) indicator on the daily chart holds above 50 and Gold continues to trade above $3,355, where the 20-day and the 50-day Simple Moving Averages (SMAs) align. This technical picture suggests that the bullish bias remains intact but lacks momentum.
On the downside, $3,355 (20-day SMA, 50-day SMA) aligns as the first support level before $3,300-$3,285 (round level, 100-day SMA, Fibonacci 23.6% retracement of the January-June uptrend) and $3,200 (static level, round level).
In case Gold rises above $3,400 (static level, round level) and starts using this level as support, $3,430 (static level) could be seen as an interim resistance level before $3,500 (all-time-high).
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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