Gold Selloff to Resume as US Earnings Season Begins

The yellow metal had come under pressure over recent weeks amid fading inflation expectations as increasingly lackluster US economic data trimmed investors’ expectations for recovery in America and the world at large, particularly as other engines of expansion also falter. Indeed, debt-cutting measures and rising financing costs promise to keep Europe sidelined for the foreseeable future, Japan remains mired in deflation, and China is stepping up efforts to slow its buoyant growth amid fears of overheating. On balance, this translated into a tepid outlook for price growth, eroding investors’ demand for an inflation hedge that had driven gold prices higher through 2009 and the beginning of this year. Indeed, the US 2-year breakeven rate, the spread between nominal and inflation-adjusted 2-year Treasury yields, has dropped to a nine-month low, hinting traders are betting on decidedly weak price growth for the time being. Fittingly, the 20-day correlation between the 2-year breakeven and spot gold has jumped to 0.86, the highest since late April.

Looking ahead, the start of the US corporate earnings season and a wealth of top-tier economic data including retail sales and CPI should take the spotlight. US fundamentals have taken a notable turn for the worse in recent months, with more of the same expected in the near term, while companies are likely to trim their profit forecasts amid expectations of a worldwide slowdown in the pace of recovery. Taken together, this should prove to weigh further still on inflation expectations, encouraging renewed enthusiasm among the bears and pushing gold prices lower.