Gold Fundamental Forecast: Bullish

• Falling real rates and rising inflation concerns may continue to drive bullion prices higher in the near-term.
• However, hotter-than-expected inflation and retail sales figures could fuel tapering bets and undermine the price of gold.

Gold prices have continued to track higher in the last six weeks, pushing back above the $1800 per ounce level for the first time since late-February on the back of rising inflation expectations and falling real rates of return.

US 10-year breakeven rates – the market’s implied inflation gauge – have surged to the highest levels in nine years, as substantial fiscal stimulus, loose monetary policy conditions, supply chain issues, and the reopening of the global economy bolster consumer price growth.

The Federal Reserve has reiterated its accommodative monetary policy stance in recent days, despite strong economic data, with Vice Chair Richard Clarida stating that “I think what the data is telling us now is there is going to be some upward movement as we reopen, but that it won’t persist over a long period of time.”

This rhetoric has kept nominal bond yields in check, with rates on US 10-year Treasury notes struggling to hold convincingly above 1.6%. With the Biden administration pushing for a $2.3 trillion infrastructure spending package and a $1.8 trillion American families plan, inflationary pressures may continue to build in the near-term.

This will probably continue to keep real rates of return capped, as the Fed’s rhetoric stymies the potential uptick in nominal yields, paving the way for anti-fiat bullion to gain ground in the coming weeks.

Inflation, Retail Sales Data in Focus

Looking ahead, inflation and retail sales figures for the month of April will be keenly eyed by market participants to determine whether or not the economy is making the substantial further progress needed to force the Fed into tapering stimulus.

Although this seems relatively unlikely, hotter-than-expected data could fuel tapering bets and take some wind out of gold’s sails. However, a series of weaker prints would probably reinforce the Fed’s dovish stance and drive gold prices higher.

DailyFX Economic Calendar