Gold Price Analysis: XAU/USD pulls back slightly to $1860 as US inflation expectations ease

• Spot gold prices moderated on Thursday back to the $1860 level, despite a softer dollar and yields.
• Gold has been tracking US inflation expectations more closely recently, which fell back on Thursday.

Spot gold (XAU/USD) prices fell 0.5% on Thursday, despite a weaker dollar and softness in US bond yields. Prices topped out at $1870 during the Asia Pacific session and have been gradually easing ever since. At just below $1860, spot gold is only about 1.0% below the six-month highs at $1877 that it printed earlier in the week.

The move lower in gold prices came despite a pullback in the US dollar and further downside in US real and nominal yields. Starting with the former, after hitting 16-month highs earlier in the week above 96.00, the DXY has been pulling back amid broad USD profit-taking. Typically, a weaker dollar is a positive for dollar-denominated gold prices, as it makes it cheaper for purchase by the holders of non-dollar currencies.

US data continues to beat expectations, with Thursday’s initial jobless claims release showing claims dropping to a new post-pandemic low and the Philly Fed Manufacturing survey matching the NY Fed released earlier in the week for strength. Strong US data should keep the dollar underpinned in the months/weeks ahead.

Meanwhile, US bond yields have also been losing steam, with 10-year yields back under 1.60% having printed three-week highs at 1.65% earlier in the week. As with the dollar, this is partly profit-taking driven, though some also attributed the downside to lower inflation expectations in wake of the recent pullback in oil prices and a broader moderation in expectations for oil prices in 2022.

Indeed, gold seems to be trading more highly correlated to US inflation expectations right now than to the US dollar or US yields, as would more normally be the case. Since last week’s much hotter than expected US Consumer Price Inflation report, gold prices spiked amid demand for inflation protection. The move higher mirror a move higher in US 5-year break-even inflation expectations, which surged from close to 3.0% to record highs (going back to when the 5-year TIPS started trading in 2004) above 3.30% this week. That move above 3.30% no Tuesday coincided with gold’s highs of the week. Since then, 5-year break-even inflation expectations have moderated back to 3.20%, seemingly weighing on gold.