Fundamental Predictions for Gold: Bearish

Gold prices surged higher for a second week as stories about the US consumer price index emphasized the yellow metal's inflation-hedging potential. According to the Labor Department, prices in the United States increased by 8.5 percent year on year in March, the highest reading since 1981. For the same period, the core reading, which excludes food and energy prices, reached 6.5 percent. Additionally, these numbers dragged down market prices due to the possibility of a more aggressive response from the Federal Reserve. In the days that followed, the benchmark S&P 500 index fell.

The good times, though, may not continue. While inflation is at a four-decade high, ahead expectations are beginning to drop. This will almost certainly have an effect on bullion prices. US breakeven rates – the difference between a Treasury yield and its inflation-indexed counterpart – are used to monitor inflation on a market-based basis. While the 1-year rate was somewhat boosted by the CPI reading, the 2-year and 5-year rates declined, showing that inflation forecasts two and five years away are moderating.

Economists share this view. Paul Krugman, an economist at the City University of New York's Graduate Center, predicted that "inflation will likely reduce dramatically during the next few months." Since April, recent movements in gasoline and oil prices indicate that Mr. Krugman's argument is already bearing fruit. According to AAA, gasoline prices in the United States have decreased by more than 5% since April 1.

Additionally, Fed rate rise bets have increased over the same period. Following last week's CPI data, overnight index swaps (OIS) are pricing in a 100 percent possibility of a 50 basis point raise at the May FOMC meeting. A burst of hawkish Fedspeak has also aided in the growth of those bets. The world's central banks have taken note. In its semi-annual announcement on Thursday, the Monetary Authority of Singapore (MAS) tightened policy. On Thursday, the Bank of Korea also announced a policy normalization. Globalization bodes ill for gold, which is a non-interest bearing asset. Having said that, gold prices may be due for a correction following their current run.