Gold price consolidates at the highest level in 2 months. Its recent rally has been driven by major banks’ attempt to tame rate hike expectations. We expect its strength to remain in the near-term. However, elevated inflation would eventually force central banks to reduce monetary stimulus and increase the policy rate, leading to decline in the yellow metal’s price.

Last week, the Fed formally announced to begin QE tapering in mid-November. Policymakers acknowledged that the employment market and inflation have achieved “substantial further progress”. However, they reiterated that recent strength on inflation was driven by “transitory” factors and that it’s “appropriate” to leave the Fed funds rate at 0-0.25% until the employment situation has reached what the Fed assessed as “maximum employment” and inflation has “risen to 2% and is on track to moderately exceed 2% for some time”. Market expectations of at least a rate hike in June 2022 slipped to 57.3% as of November 9, from 58.5% before the November meeting. Elsewhere, the BOE disappointed the market by leaving the Bank rate unchanged at 0.1% last week, despite the affirmation that “it would be necessary over coming months to increase Bank Rate in order to return CPI inflation sustainably to the 2% target”. The Committee voted 7-2 to keep the policy rate on hold, signaling that it was not so much a tight race between hawks and doves although inflation is expected to accelerate further to +4.5% in November. The ECB in late October attempted to downplay the urgency of rate hike.

However, strong inflation has so far proved more persistent than central banks have anticipated. In the US, headline CPI is the US is estimated to have increased +5.3% in October from the same period last year. This was only a mild drop from +5.4% y/y in September. Core CPI is expected to remain steady at +4% y/y in October. Longer-term inflation expectations have stayed above the Fed’s +2% target.The negative correlation between gold price and real yield was derailed from mid-August to early October. Yet, it has recently to “normal” with the 90-day correlation at -0.5. We expect the outlook of gold price would be closely related to the inflation outlook together with rate hike expectations as reflected in Treasury yield.