Key US inflation data due Wednesday … but will sizzling gold keep shrugging regardless?

All manner of narratives are being thrown up for the sizzling gold price performance of recent weeks as markets attempt to find rational explanations for investors.

The latest piece of the puzzle drops Wednesday when US CPI data will be reported.

Outside of that CPI data throwing up an extremely high inflation pointer, the question is whether the gold price will react decisively beyond any initial convulsion?

Or will it more or less remain strong and strengthening regardless?

No ordinary times

Recent evidence suggests that that will be the case, though a ‘tipping point' is always possible.

Strong US jobs data last week would ordinarily be considered a dampener on gold given it points to a ‘hot' economy rather than one where inflation would be cooling.

Instead, gold on Monday reached a new high of more than US$2350/oz.

On Friday, investment bank Citi increased its gold price target over the next three months to $2400/oz and its "topside" level over the next 6-12 months to $3000/oz.

It confirmed these were not ordinary times with the comment: "Gold-real rates relationship remains historically weak … which places greater emphasis on other price drivers."

London capital markets firm SP Angel also noted the unusual backdrop, saying the soaring price of the metal over the past month had "dumfounded analysts, given the break from its tight correlation with US Treasuries, which have sold off over the past month".

Both firms offered some broadly similar explanations.

Price drivers

"A combination of alternative-fiat demand, geopolitical hedges, macro overlays on equity and credit portfolios, and financial buying catching up to robust physical (demand) appear to be working in synch to push the bullion complex higher," Citi said in an analyst note to clients titled "Rational exuberance for gold and silver markets".

SP Angel said central bank buying had "been a sustained source of support for gold", with newswire Bloomberg reporting China's PBOC has added gold for the 17th month in a row.

China's reserves have reported now risen to circa 73 million oz, SP Angel said, "with strong trading noticeable in Asian trading hours".

SP Angel also said futures data suggested "momentum-based algorithmic funds have been ramping up purchases, with overall futures trading jumping".

Still, the future direction of interest rates cannot be denied as a key backdrop even if the connection is murky at present.

"Traders are also likely buying in advance of a global rate cutting cycle, with the Fed reiterating their intention to cut rates this year, despite hot economic data and inflation trending above the 2% target," SP Angel said.

"However, this would suggest a divergence between bond traders and gold traders, with the Treasury market yet to reflect an imminent cutting cycle as yields continue to climb, sitting at year-to-date highs."

Speaking of highs, highly regarded gold hedging expert Sean Russo of risk advisory Noah's Rule said at Mining News Select in Sydney last month that he also thought gold's recent gain suggested investors were starting to get wary about the high trading level of general equities.

"I think that's what gold is really sniffing out," Russo said

"Smart money is starting to go ‘I don't have to sell very many of these equities to buy quite a lot of gold'."