Fundamental Analysis

Gold Rally Continues on Soft Manufacturing Report

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Gold has started the week with gains. In Monday's North American session, spot gold is trading at $1234.23 per ounce. In economic news, the sole US indicator on the schedule, the Empire State Manufacturing Index, softened to 9.8 points. This was much weaker than the estimate of 15.2 points.

The gold rally has continued on Monday, after posting strong gains of 1.4% last week. The metal moved higher on Friday, taking advantage of weak consumer inflation and spending data in June. CPI edged up to 0.0%, short of the forecast of 0.1%. Retail Sales declined 0.2%, missing the estimate of 0.1%. This marked the third decline in the past four months. Consumer spending accounts for 2/3 of US economic activity, so it's no surprise that weak spending has also meant weak inflation, despite Janet Yellen's claim that low inflation is a temporary phenomenon. The US economy had a weak first quarter, with growth of just 1.4%. If second quarter numbers follow suit, investors' risk appetite could diminish and gold could move upwards.

Inflation levels in the US remain stubbornly low, but the Federal Reserve remains convinced that it's only a matter of time before inflation levels move higher. This stance was reiterated by Fed Chair Janet Yellen last week, as she testified before congressional and senate committees. With the labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn't pushed inflation to higher levels. In her testimony, Yellen admitted that the Fed was at a loss to explain the lack of inflation, but insisted that it was "premature to conclude that the underlying inflation trend is falling well short of 2 percent", and that with a strong labor market "the conditions are in place for inflation to move up". Is Yellen's argument just wishful thinking? The markets aren't buying in to the Fed spin, with the odds of a December hike at just 43%, according to the CME Group.

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