Gold prices traded modestly higher after falling -0.37% a day ago, as weakening Treasury yields and a cheaper US Dollar boosted the appeal of the non-interest-bearing metal. China’s producer price index (PPI) surged to 9.0% in May, a level not seen since 2008, also surpassing a baseline forecast of 8.5%. PPI measures the change in prices at the factory gate, thus serving as a leading indicator for the CPI as producers may pass on higher production costs to the end consumers.

Image Source: Pixabay

China’s official consumer price index (CPI) came in at 1.3% YoY in May, a notable increase from April’s reading of 0.9%, but below the market expectation of 1.6%. The slight miss may be attributed to a modest 0.3% rise in food prices as the price of pork tumbled 23.8% from a year ago. Yet, a rapid surge in crude oil, iron ore, base metals, and other bulk commodities pushed non-food prices higher. Further price pressure may be seen in the months to come given a significant climb in PPI.

China PPI vs. Gold Prices – 2000 to 2021

Source: Bloomberg, DailyFX

Rising price pressures may continue to support gold, which is widely perceived as a store of value and hedge against inflation. On the demand side, Chinese buyers have returned to the bullion market since April after the People’s Bank of China (PBoC) eased curbs on non-monetary gold imports to meet rising domestic demand. Since then, Chinese gold imports have picked up significantly (chart below). As the world’s third-largest gold importer, Chinese buyers may provide medium-term support to gold prices.

Source: Bloomberg, DailyFX

Looking ahead, traders are eyeing Thursday’s US inflation data for clues about rising price levels in the US and their ramifications for Fed monetary policy. US headline inflation is expected at 4.7% YoY in May, hitting the highest level since 2008. A large deviation from this expectation may lead to heightened market volatility, especially for stocks, forex, and precious metals. While a higher-than-expected reading may bolster precious metals, it may also stoke tapering fears and undermine their gains. This mixed dynamic renders gold prices vulnerable to heightened volatility during and after the data.

Technically, gold prices are facing selling pressure above a psychological resistance level of $1,900. Prices remain in an “Ascending Channel” formed since early April, suggesting that the overall trend remains bullish-biased. Breaching above $1,900 may open the door for further upside potential with an eye on $ 1,922 (the 61.8% Fibonacci retracement). The MACD indicator formed a bearish crossover, signaling that a technical pullback maybe underway.

Gold Price – Daily Chart