'Broken Hearts' Again in Gold as U.S. Retail Sales Trigger Metal’s New Crash

© Reuters.

By Barani Krishnan

AiVIF.com - It can’t prosper much on soft inflation; neither can it survive an economy rebounding on strong retail sales.

Gold crashed to a five-week low beneath $1,750 an ounce on Thursday after U.S. retail sales jumped more than 15% in the year to August, putting the economy in ebullient light after weeks of challenging data from Covid’s Delta variant.

Gold futures’ most active contract December on New York’s Comex down $43.75, or 2.4%, at $1,751.05 by 10:25 AM (14:25 GMT). The session bottom was $1,745.50, the lowest since Aug. 12.

“Broken hearts for gold bulls once again,” markets’ commentator Adam Button said in a post on ForexLive. “(It) can't get a lift on soft inflation, (and is) crushed in retail sales.”

The U.S. Consumer Price Index, a key measure of inflation, expanded by 5.3% for the year to August, after a 5.4% growth in July, according to data released earlier in the week.

"Gold has fallen out of favor and fast,” said Craig Erlam, analyst at online trading platform OANDA. “This comes only a couple of days after it broke back above $1,800 on the back of softer U.S. inflation data. That celebration was short-lived and it's suddenly looking rather vulnerable.”

Erlam said from a technical perspective, gold’s $1,780 level marked the neckline of a “head and shoulders” move formed over the last month, peaking at $1,833.

“The fact that this has come ahead of the Fed meeting doesn't bode well for the yellow metal,” Erlam said. “Recent data has given the Fed room to be more patient with tapering but the commentary we had late last week from officials suggested many aren't discouraged. Gold could feel the love once more should policymakers change course next Wednesday but it could be a long week for the yellow metal in the interim.”

Markets are reacting more noisily than usual to U.S. economic data this week, with the Federal Reserve entering its typical blackout period ahead of its Sept. 21-22 policy meeting.

The question of when the Fed ought to taper its stimulus and raise interest rates has been hotly debated in recent months as economic recovery conflicts with a resurgence of the coronavirus’ Delta variant. Chairman Jay Powell is to hold a news conference next week after the Fed’s two-day policy meeting.

The Fed’s stimulus program and other monetary accommodation have been blamed for aggravating price pressures in the United States. The central bank has been buying $120 billion in bonds and other assets since the Covid-19 outbreak of March 2020 to support the economy. It has also been keeping interest rates at virtually zero levels for the past 18 months.

After declining 3.5% in 2020 from business shutdowns owing to Covid-19, the U.S. economy expanded robustly this year, expanding 6.5% in the second quarter, in line with the Fed’s forecast.

The Fed’s problem, however, is inflation, which has been outpacing economic growth.

The central bank’s preferred gauge for inflation - the core Personal Consumption Expenditures Index, which excludes volatile food and energy prices - rose 3.6% in the year through July, its most since 1991. The PCE Index including energy and food rose 4.2% year-on-year.

The Fed’s own target for inflation is 2% per annum.

Sunil Kumar Dixit, chief technical strategist at SK Charting in Kolkata, India, said the performance of the Dollar Index and -year U.S. Treasuries would be integral for gold’s behavior.

The Dollar Index, which pits the U.S. currency against six major forex rivals led by the euro, was up 0.4% at 92.87. The yield on the 10-year U.S. note was up 2.3% at 1.33.“A DX above 93 can head higher towards 93.60 & 93.90, triggering an even harder sell off in gold,” said Dixit.