Traders paid attention to Tuesday’s Consumer Price Index (CPI) data, which came out above market estimates. The headline CPI jumped 0.6% month-on-month instead of the expected 0.5% jump, and 2.6% year-on-year instead of the expected 2.5%.
That was the biggest monthly jump since June 2009 and the biggest Year on Year jump since August 2018, as CPI followed PPI higher.
Federal Reserve (Fed) governors have said many times that they are prepared to ignore periods of inflation climbing above its 2% threshold without changing their accommodative policy stance. They see these episodes as temporary in nature.
Earlier in the week, the Fed’s James Bullard said that the central bank should start tapering its bond-buying program when 75% of the US population will have immunity to the virus, either from the vaccine or from a previous infection. Assuming the pace of vaccination stays the same, that threshold should be reached by the end of summer.
Additionally, markets are now pricing four rate hikes over the next two years, which tells us that the Fed will be pushed into action if inflation continues to run above 2%. That should come sooner rather than later.
If the Fed starts normalizing monetary policy, it is hard to see a bullish scenario for precious metals. For now, the gold’s 1,680 USD support is holding, and a small rally started, but gold needs to make a significant break above 1,765 USD to start some bullish momentum. Silver is trying to stay above 25 USD for now.
To conclude, should the Fed announce tapering, yields, and USD will most likely rise, which should be negative for precious metals. It looks like gold topped in August 2020, and the bull market has ended, for now.