Is it worth speculating whether the Fed is right or wrong to expect to see a temporary spike in inflation? Isn't it better to just buy gold? According to research by Credit Suisse, the precious metal performed very well during periods of high consumer prices, even in countries where they jumped to double digits. Even if the US CPI stays at 3% or higher for 4-6 months, the Fed will still adhere to the mantra of the temporary nature of such a movement. So does the Bank of Norway, where inflation has been above the 2% target for more than a year. It is not easy to admit that you are wrong in the face of the entire market.
After disappointing US employment statistics for April, gold posted its best daily gain since November, amid falling Treasury yields and a weaker dollar. The worse-than-expected data proved that the US economy is not out of the woods yet, and the Fed should be patient - not rush to start normalizing monetary policy in the form of curtailing the $120 billion quantitative easing program. This was discussed by most of the representatives of the Central Bank. In particular, Lael Brainard noted that the prospects for the US economy are encouraging, but the regulator is still far from its targets for inflation and employment.
Market reaction to disappointing US employment data
The Fed's dovish rhetoric and rising inflation expectations – what could be better for the XAU/USD bulls? According to the New York Fed, consumers expect prices to rise by 3.4% in a year and 3.1% in three years. The precious metal is traditionally used as a hedging tool against inflation, so its acceleration and the passivity of the Fed create a favorable external background for it, which the XAU/USD bulls do not tire of using.
Even though fears about the rise in US consumer prices to 3.6% YoY in April, which gives grounds for talk of curtailing QE, forced gold to take a step back, its fans are not going to give up. The effect of last year's low base and the Fed's desire to sit on the sidelines for an extended period of time will allow the precious metal to continue its upward march, so any correction is likely to be immediately redeemed.
Looking at the disappointing US labor market statistics for April, you begin to doubt that the US economy will be able to accelerate to 6.5%, as the Fed would like. Thanks to accelerated vaccination, the Eurozone is capable of surpassing the IMF's GDP forecast of 4.4%, which will lend a helping hand to the EUR/USD bulls, contribute to the fall in the USD index, and the growth of XAU/USD quotes.
Technically, the implementation of the "Wolf Wave" pattern continues on the daily chart. Its target of $2,025 per ounce looks very impressive, but the bulls are likely to face more obstacles along the way. Nevertheless, I recommend holding long positions formed on the breakout of the $1,800 mark and increasing them on pullbacks. The precious metal is far from reaching its potential, but it intends to do so in the coming months after a not very successful start in 2021.
Gold, Daily chart