Market update: Fed divided, today’s inflation data crucial for gold & silver momentum?

Gold and silver have regained momentum, but the battle is not yet decided. US inflation figures due to be released today (12 Aug, 14:30) could prove decisive, while the world awaits a Hormuz deal.

Gold and silver price gains

Gold and silver moved largely sideways in June and July, but a strong recovery has taken hold since the start of August. The precious metals have regained momentum; the gold price briefly rose above €123,000 per kilogram today (12 Aug), while the silver price climbed above € 1.850 per kilogram.

Gold and silver prices. Source: Holland Gold.

Yesterday (11 Aug), the gold price broke through the $4,400 per troy ounce (31.1 grams) level in dollar terms, and today the gold price is once again trading just above or below this level. This suggests that the gold price is hovering around its 100-day moving average, raising the question of whether it can continue climbing towards its 200-day moving average.

Gold spot price in $ per troy ounce (yellow line) versus the 100-day moving average (black line) and the 200-day moving average (grey line). (Source: Bloomberg).

“The macroeconomic backdrop has become more favourable, but remains fragile,” said Ole Hansen, head of commodity strategy at Saxo Bank AS. “A weaker dollar and reduced expectations of further interest-rate increases by the Fed [US central bank, ed.] have supported precious metals. But renewed inflationary pressure, another sharp rise in oil prices or stronger-than-expected US economic data could quickly reignite expectations of further rate hikes,” he said.

Expected inflation figures

The US CPI inflation figures for July could provide precisely the kind of inflationary pressure that might push the US central bank (Fed) towards another interest-rate increase. Analysts expect an increase of 0.1% overall, following a decline of 0.4% in June. Annual inflation is expected to come in at 3.4%.

US inflation figures (CPI), showing the year-on-year change in prices. (Source: Goldsilver).

The better-than-expected inflation figures in June and disappointing jobs data last Friday provided an additional tailwind for precious metals. If today’s inflation figures come in higher than expected, that would be negative for gold. Lower figures, by contrast, would be positive because they would reduce the need for the Fed to raise its policy rate.

Just how divided the markets are over a potential interest-rate increase is evident from the CME FedWatch Tool. Based on futures market positioning, the market estimates the probability of a rate increase at 48.1%. This leaves the market almost evenly split, 50/50, between a rate increase and the policy rate remaining unchanged.

Black gold & yellow gold

Energy prices are, of course, one of the factors that strongly influence inflation figures. Oil prices rose for six consecutive days before falling slightly again today, Wednesday (12 Aug), to $88.63 per barrel for Brent oil futures. The rise in prices was driven by deadly attacks on ships in the Red Sea and the Gulf of Oman.

Various statements by Trump and their impact on oil prices, expressed as the percentage change compared with the previous day’s closing price during the Iran war. (Source: Bloomberg).

Trump is also adding fuel to the fire with his rhetoric surrounding a possible agreement between Iran and Oman over the Strait of Hormuz. An overview by Bloomberg shows how various statements by the US president have sent oil prices in different directions. Trump claimed today that the US has “total control over the Strait of Hormuz,” and told reporters: “We own it.” While Trump increases the pressure, mediators Pakistan and Qatar remain cautiously positive about the progress. Meanwhile, Iran appears to be demanding that America end the war and release frozen assets.

In short, gold and silver have regained momentum, but markets remain deeply divided over the Fed’s interest-rate path, with oil prices, employment data and inflation figures appearing to be the key drivers.