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. 

To answer that question, it’s looking it is. According to the Bank of America (BoA), there are three main reasons for the decreasing value of gold: the weakening of physical demand, a lackluster jewelry market, and a lack of investor interest.

The central banks' demand decreased by nearly 60 percent in 2020, according to the World Gold Council (WGC). In the fourth quarter of 2020 alone, central banks bought a net of 44.8 tons of gold from about 140.7 tons a year before that.

Additionally, the jewelry market has been hit hard by the pandemic. Last year, the total annual demand for gold pieces was 34 percent less than it was in 2019, which marks a new annual minimum in history according to observations by the WGC.

The current market sentiment also favors lower gold prices. Traders are pricing in three rate hikes, starting in late 2022, as inflation expectations have risen sharply. The Federal Reserve (Fed) will need to tighten monetary policy sooner than previously thought, or the central bank risks inflation getting out of control. 

Rising US yields are usually positive for the USD, and the greenback has been rallying recently, hitting multi-month highs against most of its major peers. 

Vaccinations are ramping up, and the return to normalcy might be expected later this year. Another bearish sign for gold is that investors would rather hold stocks of companies with rising revenues rather than gold which has no dividends or no interest. 

Technically speaking, the last bullish support for gold is in the 1,680 to 1,670 USD area, where the uptrend line from 2019 and 2020 lows is converged with the strong horizontal demand zone of Summer 2020 lows. 

Should the price decline below that support zone, it might be the last nail in the coffin for gold, with a possible return to 1,500 USD. 

The US 5-year Breakeven Rate just hit 2.65%. The last time it hit this level was in 2006 when the US was in the middle of a massive housing bubble and oil was on its way to 150 USD per barrel.

Another inflation scare comes from US yields, which have been roaring higher recently, and the 10-year yield climbed to 1.75%. Last seen in January 2020.

Additionally, most commodities are in steep bull trends, signaling higher prices are here to stay. 

Traders and investors are buying some new, untraditional assets, such as cryptocurrencies. The most famous one, Bitcoin, is up more than tenfold since its March 2020 lows. All the markets are screaming inflation is coming. Investors are buying hedges against inflation, but the Federal Reserve (Fed) believes inflation won’t even hit 2% for three more years.   

“[Cryptocurrencies] are more of an asset for speculation, so they're not particularly in use as a means of payment. It's more a speculative asset. It's essentially a substitute for gold rather than for the dollar." said Fed Chair Jerome Powell said on Monday.

So, if gold usually goes higher when inflation rises, and now bitcoin is on the run, what does that tell you? Everyone excepts higher inflation except the Fed. 

Most of the time, the market is right, and the Fed is wrong. The central bank is reactive instead of proactive. We think that the Fed has it wrong this time as well, and inflation will overshoot their official 2% target sooner rather than later. 

What happens next? Well, the Fed should start tapering quantitative easing and raise rates, but that would pop the bubble in equities. The bank is stuck in a tricky situation. Not doing anything will lead to uncomfortably high inflation, while doing something could lead to a crash in the stock market. The show is just beginning, there will definitely be more to come. 

The USD continues to increase, although the momentum seems to be waning as market participants are in a wait-and-see regime ahead of the Federal Reserve’s (Fed) next meeting. 

On Wednesday, the critical Federal Open Market Committee (FOMC) meeting will conclude, and since Jerome Powell failed to deliver a dovish turnaround at his last speech, investors continue to be afraid of higher inflation. Thus, bond yields remain in a steep uptrend, undermining stocks.

Additionally, the passage of the 1.9 trillion USD American Rescue Plan should provide another boost to the US economy. However, the latest surveys have shown that 50% of check receivers in the United States want to spend the new money on trading stocks.

Therefore, the inflation impact will most likely be smaller than if all the money went straight into the economy. 

The Fed will also provide its own economic projections, and traders will be eyeing Gross Domestic Product (GDP) and inflation expectations. 

On the one hand, rising inflation expectations lead to higher US yields, something which has recently strengthened the USD. However, high yields might hurt the US economy, and the Fed knows that. The only question is where is their maximum pain threshold, is it 2% for 10-year maturity? Most likely, yes.

So, bond yields could continue trending higher until the Fed intervenes again. At that point, yields are expected to drop, along with the greenback, and stocks with precious metals might go higher again. 

Till that happens, the EURUSD might trade sideways at around 1.19, but the USDJPY – which is the most correlated pair with US yields - pair is at nine-month highs above 109.

The big oil rally seems to be far from over, and the WTI (West Texas Intermediate) benchmark rose above 67.50 USD on Monday for the first time since October 2018.

Offshore oil and gas development is set to recover from the shock that prices and demand went through due to the pandemic. It’s also set for a new record in project commitments in the five years leading up to 2025, according to Rystad Energy. This news was well-received by oil companies last week. 

Additionally, oil operators are expected to commit to developing a record number of offshore oil and gas projects over the next five years.

According to the Goldman Sachs correlation analysis, based on daily charts, oil and copper are among the best-performing assets during inflation times. Oil is up hundreds of percent from its April lows when the price went negative for a day. 

Earlier in the month, Goldman raised its Brent crude forecast by 5 USD per barrel to 75 USD for the second quarter of 2021, then pushed it further to 80 USD for the third quarter.

Last Thursday, OPEC (Organization of the Petroleum Exporting Countries) started another rally in oil price after the decision to keep output quotas unchanged in April. This happened despite market expectations for supply to notch up to meet demand, as the world progresses in COVID-19 vaccination campaigns.

It looks like oil could hit the 70 USD level sooner than later, especially if central banks and governments continue to flood the markets with liquidity. Therefore, Goldman's 80 USD target is looking pretty realistic this year. 

On the downside, the first stronger support is seen at February highs of 63.50 USD for WTI, with the other demand zone most likely at around 60 USD.