Gold's Bullish Potential Amid Inflationary Adjustments

Given the significant variability in major inflation indicators, the gold (XAUUSD:CUR) market is exhibiting promising signs of growth, acting as a safe haven for investors aiming to shield themselves from both inflation and deflation. As primary inflation rates hint at a deceleration, gold becomes an attractive safeguard in diverse investment portfolios, which could potentially trigger an increase in its demand. Concurrently, the anticipated fall in the Consumer Price Index (CPI) for June, alongside lower energy costs and persistently elevated long-term inflation, enhance the lure of the gold market. Yet, the situation becomes intricate as the Federal Reserve grapples with the difficult task of tackling inflation and avoiding an economic slump. In this environment of uncertainty, the gold market becomes a complex proposition. This article will probe into these complex factors, assessing the performance of SPDR Gold Shares (NYSEARCA:GLD), reviewing crucial measures, analyzing technical indicators, and providing an exhaustive perspective on the gold market given the current inflationary conditions. You can read my previous coverage on GLD here.

Impact of Easing Inflation and Falling Energy Prices on the Gold Market

The recent easing of the CPI to 4.13% over the previous 12 months until May, coupled with a modest dip in core CPI to 5.33%, indicates bullish potential for the gold market. As the inflation rate tapers off, yet remains significantly above average, investors might perceive this as an opportune moment to safeguard their assets by investing in the gold market. Hence, this slowdown in inflation can increase gold’s appeal as a reliable asset in a diversified portfolio, potentially driving an upturn in the gold market influenced by these lowered CPI figures.

In addition, the anticipated significant fall in CPI in June due to base effects further bolsters the bullish outlook for gold. The previous year’s substantial increase in monthly CPI from May to June will be phased out of the current year’s CPI calculations as shown in the chart below. Consequently, this expected decrease in CPI could further stimulate demand for gold, driving its price upwards.

Furthermore, the pronounced drop in energy prices in 2023 as shown in the chart below, provides further impetus for a bullish stance towards gold. Reduced energy prices can potentially decrease the costs associated with gold mining and production, such as extraction, refining, and transportation, thus increasing profitability. Moreover, the lowered energy prices, which significantly contribute to the overall fall in inflation, bolster gold’s appeal as a hedge against deflationary pressures. As the cost of living declines, gold’s role as a store of value grows increasingly crucial, potentially leading to increased demand and a corresponding rise in gold prices.

Moreover, the slowdown of the monthly sticky price CPI – excluding food, energy, and shelter – to 0.336%, or 4.0% annualized, further underscores the potential for a bullish gold market. Despite an overall reduction in inflation indicators, this figure, double the Federal Reserve’s 2.0% target, indicates enduring inflationary pressures within the economy.

Additionally, the key indicator of underlying inflationary pressures comes from the rise in average hourly earnings, standing at a monthly growth of 0.454%, or 5.45% annualized in May 2023, as shown in the chart below. This trend is especially bullish for the gold market as wage increases often drive higher consumer spending, leading to inflation. Furthermore, if wage growth outpaces productivity growth, it could potentially result in a stagflation scenario. Historically, gold performs well in such environments, serving as a safe-haven asset and a hedge against inflation. Therefore, this wage increase strengthens the bullish sentiment in the gold market.

The predicted decline in annual CPI figures for June, due to base effects, might allow the Federal Reserve to continue its pause in rate hikes. However, persistently high inflation seen by the average hourly earnings suggests the potential for a hawkish stance by the Federal Reserve to maintain or even increase interest rates by year-end. This dual scenario creates a complex landscape for the gold market. On the one hand, a pause in rate hikes generally bolsters the appeal of non-yielding assets like gold. On the other hand, high inflation could enhance gold’s attractiveness as a traditional hedge against inflation. Simultaneously, the declining Chicago Fed Financial Conditions Index as of June 9th suggests easier financial conditions, potentially leading to further liquidity support to counter the tighter credit conditions resulting from possible rate hikes, which could also favor gold prices.

Examining the Bullish Momentum of GLD ETF

GLD remains the best investment vehicle to invest in the gold market due to the total assets under management standing robustly at $58.84 billion. The strong rebound in the assets under management creates a positive investment outlook for GLD. Moreover, the net asset value for GLD is currently trading at record highs, further reinforcing the bullish perspective. As can be observed from the chart below, there is a directly proportional relationship between the net asset value and the total assets under management of GLD. This relationship suggests that an increase in the total assets under management often accompanies an upswing in the net asset value.

Given that the total assets under management have begun to ascend from their lowest point, coupled with the net asset value trading at record highs, the potential for a significant market rally is substantial. A break from this record high in net asset value could trigger a robust rally in the gold market, providing a compelling impetus for prospective and existing investors. Therefore, based on these metrics, the overall perspective for GLD and its role in the gold market remains optimistic and strong.

Moreover, the 30-day average trading volume of GLD has declined during the last few weeks. Trading volume is an important indicator of liquidity and investor activity, and a decrease may suggest a lower level of trading interest in the ETF. This reduction could affect the bid-ask spread, potentially making the ETF less liquid and possibly more volatile. While a declining trading volume doesn’t necessarily indicate a negative performance outlook, it’s an aspect that investors should monitor closely as part of their comprehensive analysis of the GLD ETF.

Furthermore, the technical forecast for GLD presents a robust bullish trend, as illustrated in the monthly chart below. The chart is previously discussed, where the inverted head and shoulders pattern signals a strong base, breached at $130. This has led to the formation of a bull flag above this inverted head and shoulders. These kinds of bullish patterns are highly optimistic, indicating potential higher breakouts in the GLD ETF. The breakout point for the bull flag is marked at $191.36, as depicted in the chart below, with substantial support standing at $182, which is the current trading price. Based on this analysis, it’s evident that if GLD holds its ground at $182 and surpasses $191.36, it will trigger a significant upward rally to even higher price levels. However, due to the significance of long-term resistance at $191.36, the price can consolidate further before breaking higher.

Identifying Lucrative Opportunities in the Gold Market

Interpreting the GLD chart is made easier through the use of a gold market chart, which displays strikingly similar patterns. The gold market currently showcases a robust consolidation between the $2,075 and $1,680 zones. This tight-knit range is suggestive of a forthcoming rally once a breakout occurs. Given the fundamental perspective and bullish technical formations, the probability of a breakout towards the higher side seems more likely.

Gold has begun a downward correction from the stiff resistance of $2,075, a movement that is likely to present a lucrative buying opportunity for long-term investors. These long-term patterns also suggest current-level consolidations before the price breaks out upwards.

To gain a deeper insight into the gold market’s future trajectory, the weekly chart is examined. The chart below indicates a strong buying opportunity due to the market’s impressive performance last week. Notably, the chart details the 10- and 20-week moving averages, with the price supported by the 20-week average. An attempt was made last week to undercut this average, but a powerful rebound ensured the price stayed above it. This strong bounce back from the $1,950 support also left behind a wick that endorses a bullish price structure. The preceding week’s candle was an inside candle, and the subsequent wick’s appearance bolsters the short-term bullish potential in the gold market.

In the short term, the gold market shows signs of a strong reversal on the daily chart, with the previous week’s daily candle forming a bullish hammer. This bullish hammer, formed at the support of the channel, suggests an acceleration of the price towards the upper side, implying a potential buying opportunity for investors around the $1,900-$1,950 region.

Bottom Line

In conclusion, the current landscape presents a complex yet promising environment for the gold market. As the Federal Reserve balances combating inflation and avoiding an economic downturn, gold emerges as a potentially rewarding asset class. Its traditional role as a hedge against inflation and its resiliency in the face of economic uncertainty render it a favorable investment choice. Moreover, GLD ETF, with its solid rebound and record high net asset value, remains a strong contender in the marketplace, exhibiting a bullish momentum and a positive investment outlook. Although the 30-day average trading volume shows a recent decline, the overall metrics still lean towards an optimistic and robust gold market.

Analyzing the technical charts and gold market dynamics, the potential for a strong rally is clear. Given the current consolidation between the $2,075 and $1,680 zones and the bullish technical formations, a breakout towards the higher side seems more likely. The market’s performance last week and the subsequent formation of a bullish hammer suggest potential buying opportunities for investors around the $1,900-$1,950 level. Investors looking to augment their portfolios with buy positions may see this range as the next potential entry point, or those considering introducing gold to their portfolios can also establish positions here. If the gold market dips below $1,900, the downturn could extend to $1,847, which represents another attractive point to purchase gold.