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  • Gold prices are dropping as US inflation rises to its highest level in decades.
  • As an inflation hedge, the gold price will not benefit if the November US inflation report (CPI) increases the odds of a Fed rate hike.
  • Gold may outperform during a period of high volatility, unlike other assets. 

Gold price declined ahead of the November US inflation report (CPI), which is expected to show the highest inflationary pressures in nearly 40 years. The inflation rate is at its highest level since March 1982, at + 6.8% y/y.

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But gold prices do not appear to be improving; in fact, gold prices dropped this week, raising questions about the precious metal’s role as an inflation hedge.

The situation is more complicated in the short term. Although US inflation is rising and nominal bond yields are rising, long-term inflation expectations are falling. Due to the Federal Reserve’s expectations of future rate hikes, the 5-year US inflation swap is down about 5 basis points from its weekly high to 2.484% and is down from its 2021 high of 2.646% on May 26.

As the yield on US Treasuries – the nominal yield – continues to rise slowly, the decrease in the market performance of long-term inflation expectations in the US is driving the outflow of real yields from the US. The market dislikes the environment in which real yields are rising, which could explain the lack of upside potential in gold ahead of the November US inflation report. It might be the case that the price of gold falls further if the inflation report from November increases the chances of another Fed rate hike.

Gold prices historically have been associated with volatility, unlike other assets classes. During periods of greater volatility, gold tends to outperform other asset classes such as bonds and stocks, which indicate more uncertainty about cash flows, dividends, coupon payments, and so forth. The decline in gold volatility in December and the subsequent rise in gold prices have caused the relationship between thige two to normalize fairly.

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Gold price technical analysis: Maintaining a narrow range

gold price

Gold price maintains a narrow range under 20-period SMA and the key $1,780 level. Therefore, the price is likely to stay rangebound between $1,770 and $1,800. The volume data is also showing no major clue of any directional bias. Moreover, the average daily range is at 18% so far, which is lower than usual. It indicates that the market participants are awaiting a triggering event.

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