Gold crawled higher on Monday, after notching its sharpest weekly loss since November.

The precious metal was treated without mercy last week after the Federal Reserve meeting minutes pointed to a faster than expected hike in interest rates. With Fed hawks supporting king dollar and lifting Treasury yields, gold was flung into the direct firing line. Economic data on Friday also revealed that the U.S. unemployment rate fell below 4% in December as wages rose, reinforcing expectations over the Fed making a move. Given gold’s zero-yielding nature, higher yields practically sapped its appeal – dragging prices below the psychological $1800 level.

Gold outlook to be influenced by US Inflation data

In our week ahead report, we highlighted how the US CPI will no doubt grab the headlines this week.

For gold, the burning question is how the precious metal reacts to the data.

It is worth keeping in mind that gold has often been considered a hedge against inflation - increasing in value as the purchasing power of the dollar declines. So, inflation risks may encourage some investors to tightly hold onto their gold investments – especially with consumer prices projected to jump 7.1% in December.

However, more evidence of persistent US inflation may fuel speculation over the Fed raising interest rates sooner than expected. Such a development could boost the dollar and US Treasury yields, which make a toxic cocktail for zero-yielding gold. Meaning that a hot US CPI report has the potential to dent appetite for the precious metal as rate hike bets rise.

ETFs sell gold ahead of CPI

According to an automated report from Bloomberg, Exchange Traded Funds (ETF) cut 56,949 troy ounces of gold from their holdings in the last trading session (Friday).

For those who may not know, an ETF is simply an investment instrument that allows retail traders to gain exposure to an existing market or group of markets. In this instance, a gold ETF provides investors exposure to gold without having to own it physically. It seems market players may have reduced their exposure to the zero-yielding metal after the mixed jobs report. Traders are currently pricing in a 79% probability of a rate hike by mid-March 2022. Outflows from gold ETFs could accelerate if a hot CPI report boosts expectations over a rate hike in Q1.

Keep a close on the psychological $1800 level

Gold looks choppy and messy on the daily charts thanks to conflicting forces.

While bulls continue to draw strength from inflation and Omicron fears, bears remain empowered by rising Treasury yields and a stronger dollar. There seems to be tension building up in gold with $1800 acting as a key level of interest.

Prices are trading below the 50 and 200-day Simple Moving Average while the MACD is in the process of crossing below zero. However, some support can be found above $1786 and the 100-day Simple Moving average. A strong daily close above the $1800 psychological level may open the doors towards $1810, $1831, and $1845. Alternatively, sustained weakness below $1800 could trigger a decline towards $1786 and $1770, respectively.

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