FX.co ★ Gold soars following fresh US inflation data

After a weak start, gold managed to gain momentum again yesterday. The main diver for its rally was mounting inflation risks. Apart from that, the report on US housing starts showed a significant decrease.

According to the results of last week, gold grew by 2.8%. Gold kicked off the current week with losses. On Monday, the quotes sank by 0.1%, and on Tuesday by 0.7%.

On November 16, the US dollar managed to assert strength amid a sharp drop in gold prices. The greenback reached its highest level since July 2020 after strong US economic data. Thus, in October, industrial production in the country expanded by 1.6%, while retail sales rose by 1.7%.

On Wednesday, the US revealed another batch of economic statistics for October. However, fresh data turned out to be pessimistic. A report by the US Department of Commerce indicated a significant decline in new residential construction in October.

Housing starts fell by 0.7% compared to September. Adjusted for seasonal fluctuations, the indicator amounted to 1.52 million in annual terms, while economists had expected a relatively stable reading of 1.58 million.

Market strategist Jeff Wright believes that the slowdown in the pace of housing construction was due to a surge in prices for building materials due to inflation.

- The housing market was the most resilient one during the COVID-19 pandemic last year, boosting economic growth. However, volatility seems to have affected this sector as well, analyst Nils Christensen pointed out.

CIBC economist Andrew Grantham also voiced concerns about a decline in the US construction sector. He drew attention to the statements of some large developers who consider the continuing shortage of labor and rising prices for building materials to be the main reason for a slowdown.

Negative data on the US housing market adversely affected the US dollar index. On Wednesday the greenback retreated slightly from the high of last summer, falling by 0.1%.

Gold took advantage of the US dollar's weakness. Yesterday, its price soared again to the highest levels since June.

Gold ended the session on NYMEX at $1,870.20. Overall, it gained $16.10, or 0.9%.

Investors are afraid that inflation will get out of control. Therefore, they are now investing in gold to hedge inflation risks, analyst Carlo Alberto De Casa noted.

In his opinion, in the future, gold may resume steady growth only if it manages to break above $1,875. However, it will be quite difficult for gold to break through this level.

What are the main bearish factors for gold?

Carlo Alberto De Casa stresses that the probable interest rate hike is the main threat to gold. This is why investors are looking forward to the next FOMC, which is scheduled for mid-December. Some Fed officials have already hinted at a more hawkish stance on monetary policy.

The Fed began a gradual tapering of bond purchases this month, hoping to complete it by mid-2022.

However, the president of the Federal Reserve Bank of St. Louis, James Bullard, called on the central bank to trimmer asset purchases as soon as possible so that the Fed could raise the key rate next spring.

Other policymakers such as President of the San Francisco Federal Reserve Mary Daly, President of the Atlanta Federal Reserve Rafael Bostic, and President of the Chicago Federal Reserve Charles Evans are going to make a speech today. Analysts expect their statements to shed light on the pace of reduction in asset purchases and the timing of the key rate hike.

Investors hope to get more hints about the future stance of the Fed on monetary policy. Fed Chairman Jerome Powell still believes that the time is not yet ripe to raise the interest rate. So, market participants do not expect the key rate hike until the third quarter of 2022," market strategist Naim Aslam stressed.

At the same time, many experts say that inflation which has already reached a 31-year high may force the Fed to raise the benchmark rate. Therefore, they warn traders to pay attention to comments about inflation and its impact on the economy.