Spot gold gains are limited, high inflation is expected to strengthen FED's tight confidence; but dollar bulls should be wary of another scenario

On Tuesday (October 12), spot gold strengthened slightly, pushed up by inflationary pressures triggered by supply chain bottlenecks and high energy prices. However, the high-level operation of the US dollar index limits the upside of gold prices. The poor September non-agricultural data in the United States will not shake the Fed’s confidence in reducing bond purchases during the year. However, some traders believe that it is necessary to be alert to possible stagflation, which will bring disadvantages to the US dollar.


At 19:29 GMT+8, spot gold price rose 0.57% to US$1764.16 per ounce; the main COMEX gold contract rose 0.51% to US$1764.7 per ounce; the US dollar index fell 0.05% to 94.317.


The U.S. index is not far from the one-year high of 94.504 reached at the end of September. As the yield on the 10-year US Treasury bond hit a new high of 1.629% in more than 18 months, investors bet that soaring energy prices will boost inflation and will confirm the Fed’s announcement during the year. Reduce confidence in large-scale bond purchase plans.

Soaring energy prices exacerbate supply chain bottlenecks

Crude oil prices maintained their upward trend on Tuesday, re-approaching the multi-year highs set overnight, and drove the prices of other commodities higher. Driven by the rebound in global demand, rising commodity prices may exacerbate concerns about bottlenecks in the global supply chain.

Data released on Tuesday showed that Japan’s September wholesale inflation rate was at a 13-year high. For Japan, where almost all energy needs are imported, rising oil, natural gas and coal prices have affected Japan’s US$150 billion electricity market. Japanese electricity prices have risen to a nine-month high and have led to a rebound in inflation.

Analysts said that rising input costs have put more pressure on manufacturers that have been hit by supply restrictions and cast a shadow over the prospects of the world's third largest economy, which relies on exports to ease the blow of weak consumption.

British steelmakers said that unless the government provides help, they may have to stop production and face dire consequences. A spokesman for British Prime Minister Boris Johnson said on Monday that the government is listening to industry concerns and discussing whether further action is needed.

The tight supply of natural gas is contrary to the strong demand of the economy and is not conducive to their recovery from the new crown epidemic, leading to soaring electricity prices in Europe. The European Commission this week will release a "toolbox" of measures for EU countries to respond to soaring energy prices, in response to some countries' calls for the EU to respond to record prices for natural gas and electricity.

High commodity prices have become the main guide for recent market trends. The world will not get any plans to solve the energy crisis or alleviate inflationary pressures in the short term. These risks may cause many investors to focus on buying gold to hedge inflation in the short term.

The Fed tightens its confidence unshakable

Although data show that the number of jobs created by the US economy in September is the least forecast in nine months. However, the August data was revised up sharply and the unemployment rate fell to an 18-month low, indicating that concerns about labor shortages are still reasonable, inflation concerns still exist, and giving the Fed reason to reduce the emergency stimulus measures it launched last year.

According to the US Bureau of Labor Statistics, 4 million Americans have quit their jobs so far this year alone. A report from Digital.com, an independent website for small business tools, found that in the past six months, one-third of employees quit their jobs and became self-employed.

Ray Attrill, head of foreign exchange strategy at National Australia Bank (NAB), said: "The main driving force is the further increase in the U.S. 10-year Treasury bond yields that we have seen, so this is a fairly simple story of widening spreads... The appeal of bad deals."

Mitsubishi UFJ Financial Group (MUFG) analyst Derek Halpenny and his team believe that the fund’s net long position of US$22.5 billion is “not too much” compared to the situation before the COVID-19 outbreak. (Note: In May 2019, CFTC speculators had a net long USD position of USD 35 billion.)

They also pointed out that the lower-than-expected US employment report in September will not derail the Fed's reduction of debt purchase plan, which should be launched next month. They believe that both technical and fundamentals indicate that the dollar will strengthen before the end of the year.

Will stagflation in the future?

The pursuit of the best yield is the dominant factor behind the rise in the dollar. Some traders hope to take profits, which may also limit the potential for further gains in the dollar, at least in the short term. The question now is whether the factors pushing up U.S. bond yields support further appreciation of the U.S. dollar?

The recent rise in U.S. Treasury yields has been driven by rising inflationary pressures triggered by supply chain bottlenecks and high energy prices. At the same time, the US medium-term growth prospects, as evidenced by the disappointing latest non-agricultural employment data, have become bleak. In short, this is a "stagflation" scenario.

Goldman Sachs analyst Zach Pandl and his team believe that this is usually a constructive environment for the U.S. dollar. The performance of the U.S. dollar “is often dependent on whether rising inflation reflects better growth prospects or unfavorable factors such as supply chain bottlenecks. It’s different."

When inflation expectations rise due to more favorable factors (such as better growth prospects), the U.S. dollar tends to depreciate against most currencies. With the decline in the number of cases of the new crown epidemic and the opening up of the economy, the U.S. dollar will "moderately weaken" before the end of the year. This is the market's expectations for the next few months.

Kathy Lien, managing director of BK Asset Management, said: “Investors need to be careful because if the US inflation and consumer spending data to be released this week are lower than expected, it will be difficult for the dollar to maintain its upward trend.”

Look at $1738 in spot gold

On the daily chart, the price of gold has started a three-wave downward trend from US$1,781, and the support below looks to the 38.2% target of US$1738. Wave 3 is a sub-wave of the downward (3) wave that started at $1834. (3) Lang's 61.8% target is at $1688. (3) Wave is a sub-wave of the downward ((Y)) wave that started from 1917 USD. The ((Y)) wave belongs to the adjusted IV wave that started at $2,075.