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Gold traders and participants continue to focus upon climbing inflation

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After yesterday’s dramatic gain of $18 in gold futures, today we saw follow-through with an additional $5.30 added to the price of gold futures. As of 5:55 PM EST, the most active August 2021 Comex contract is fixed at $1830.30 after factoring in today’s gain of $5.30. The market continues to factor in the rise in inflation that was reported yesterday by the government through its consumer price index.

The other incredibly important factor was the testimony yesterday and today by Federal Reserve Chairman Jerome Powell in congressional testimony. His statements made it clear that they are willing to continue to let inflation run hotter than they had hoped for. According to the gauge used by the Fed which is the PCE (Personal Consumption Expenditure Price Index) the inflation rate on an annual basis is currently at 3.4%. This is well above their former target of 2% and surprisingly is well above what they expected inflation to move to which is below 3%.

Although the Federal Reserve has maintained that the vast majority of the upticks in inflation are transitory. That belief was put into question when Chairman Powell speaking before the house financial services panel, yesterday said, “Inflation has increased notably and will likely remain elevated in coming months before moderating.”

Over the last two days of testimony, the most important takeaway is that Chairman Powell said that it would be a “mistake” for the Fed to “act prematurely” to combat inflation that, in the end, should be transitory. This means that the Federal Reserve will continue its current dovish monetary policy with continued monthly purchases of U.S. debt and mortgage-backed securities totaling 120 billion per month. They will also keep their Fed funds rate between zero and 25 basis points (.25%).

With the PCE at 3.4% (this index does not account for increases in energy or food costs) and the CPI data which came out yesterday at 5.4%, it is clear to see that we have an inflation rate that is at its highest point since the recession of 2008.

More so, the Federal Reserve will not act to curtail the rise of inflation we should see gold continue to trade higher. On a technical basis, the major area of resistance that gold prices overcame today was $1826.30, which is the 38.2% Fibonacci retracement area. However, it closed just above its 200-day moving average which is currently fixed at $1828.70. Currently, Australia has begun to trade and gold is fixed again above both the 38.2% Fibonacci retracement, and its 200-day moving average and is trading at $1830.60. Real resistance does not occur until the 50-day moving average which is currently at $1838.30, with major resistance at $1861.50 which is based upon the 23.6% Fibonacci retracement of the last rally.

All things being equal it seems as though the Federal Reserve’s reluctance to curtail the rise of interest rates, and its belief that the vast majority of the rise of inflation is transitory we have a perfect storm scenario that could take gold dramatically higher.

Wishing you, as always, good trading and good health,

Gary S. Wagner - Executive Producer