May 11, 2023

Why Gold Tumbled on PPI

Frank Cabibi

Gold prices fell on Thursday morning after Producer Price Index came out lower than expected suggesting a decline in inflation. The initial reaction to this news is extremely negative as many factors start playing in to market activity including SVB House hearing, debt ceiling, and other events happening today.

EdgeFinder Analysis

CHF/JPY falls with a rise in risk-off sentiment. Today's PPI numbers seemed to affect the Swiss and Japan markets as well. The pair's score is still a strong buy around +6 with almost all indicators pointing toward CHF strength. The two exceptions being retail sentiment and GDP growth which is scored at neutral.

Price is down over half a percent to start off the NY session, nearing the April lows around 149.077. This could be partially due to the overall rebound in yen which has been beaten down for some time. Because both currencies are considered risk off, traders might be looking for the more stable pick. In this case, EdgeFinder likes CHF more.

Gold tumbled on the news of lower PPI which is a helpful measure of inflation as well as demand for products such as the metal. The sell off came abruptly in the initial reaction, but the metal has paired some losses since. The USD saw an unexpected spike after a lower-than-expected inflation number. Core CPI still remained unchanged which is another concern for interest rate decisions.

One thing gold is good at is its hedge against inflation, but demand must be growing as well. Price hovers around the $2019. If a bottom was established on the current 4H candle, we may see a test to the $2030s again. However, if demand struggles still, we can expect a test at $2000 again.

JP225 remains hot on the EdgeFinder's radar which is reading a +6 strong buy. The index is relatively flat today as we near the middle of the NY session. Trend readings still point upwards despite yesterday's losses. Mixed earnings are keeping price at bay for the time being as stocks near August 2022 highs.

Unusual sentiment also makes it hard to pick sides on the index. COT and retail agree which is not very common. Both are largely short, although institutions are clearly increasing their long positions in the stock market.

Retail Spotlight

The crowd likes oil with a mixed outlook on gold. USD pairs are mixed per usual, but the strongest biases look to be on the Japanese and German stock markets. The problem as we discussed earlier is that institutional activity also agrees with retail sentiment.

Smart Money Tracker

Here's the full view of the Smart Money Tracker with its new features at the bottom. Gold is pulled up on the two new charts. Week to week data suggests a flatline on gold longs with a slight increase in USD longs. The currency pair bias chart shows a declining number of net long biases over the past three weeks. Although gold is the most bought asset on the tracker, a declining net bullish bias is something to consider.

Fundamental Spotlight

The US currently has the advantage between Europe and UK. BOE just announced a rate hike of 25 bp in the hopes of getting back under the double digits that has been pressuring UK's economy. This mild increase in the bank rate is meant to prevent a recession in the UK which seems to be working in the investors' eyes.

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