Gold surges to 1-month high, as U.S. inflation hits 40-year high Gold rose to a one month low on Friday, as U.S. inflation continued to increase to record levels. Data on Friday showed that inflation in the United States rose to 8.6% in May, its highest level in over forty years. Markets had expected CPI to climb to 8.3%, however figures exceeded expectations. Several U.S. indices fell on the news, with the Dow Jones dropping by over 700 points on the news. The S&P 500 was 2.5% down as of writing. FTSE 100 slips, following rise in UK inflation expectations The FTSE 100 also fell during today’s session, as data showed that UK inflation expectations also rose. Following a survey from the Bank of England, expectations for inflation over the year rose to 4.6%. Despite multiple rate hikes, British consumers continue to expect prices to trend upwards in upcoming months.  A rise in the cost of energy is one of the main factors in the increased expectations. The BOE’s Chief economist Hue Pill stated that, “I personally think there is more that needs to be done in this transition from what has been a very supportive monetary policy for the economy really going back to the financial crisis, through the fallout from Brexit and the pandemic”. London’s FTSE closed the week 2.12% lower.

Next week, the US Fed will set the next interest rate step and increase the range for the key interest rate by 50 basis points (bp) to 1.25-1.5%. The guidance for the markets should not bring anything new. The FOMC, the body that decides on monetary policy, should continue to assume a series of rate hikes and Fed Chairman Powell will confirm that 50bp rate hikes are on the table at the upcoming meetings. This continues the course of the last meeting in May, as the economic data has not brought any serious changes since then. The labor market has been essentially consistently strong and inflation has remained high. There will also be new estimates from meeting participants on the development of the main macro variables, including the key interest rate. Compared with the last forecasts in March, expectations for the federal funds rate should be raised. At that time, the median estimate was 1.9% at year-end 2022, which would imply rate hikes of 100 bp, including next week's rate hike. By comparison, the market is currently pricing in double that. FOMC members will likely revise their expectations upward; the question will be whether to the same extent as market expectations. Since there will be only four meetings after next week's meeting, the assessments should carry some weight. At the same time, however, it is unlikely that FOMC members' estimates will differ significantly from market opinion. Estimates for year-end inflation could be raised somewhat. Growth for 2022, on the other hand, should be revised noticeably, as the last forecasts were issued before the release of the surprisingly weak 1Q data. Overall, the inflation and growth forecasts should not have a significant impact on the markets. So, in sum, next week's FOMC meeting should have little impact on the markets but should confirm the path and set the next step. For the rest of the year, including next week's rate step, we expect rate hikes of 150 bp. June should be followed by a 50 bp rate hike in July as well. Due to a slowdown in the US economy and falling inflation rates, we expect interest rate hikes of 25 bp in September and November before the Fed decides to at least pause its rate hikes in December. Download The Full Week Ahead

The war in Ukraine brings multiple negative consequences, not only to the world economy. Russia's invasion also has a wide impact on the gold market. The Consequences Are Vast The war in Ukraine has been ongoing for more than three months. After the withdrawal from the north of Ukraine, Russia has focused on the east and south of the country, aiming to take full control of Donbas and to create a land corridor between it and Crimea. The consequences of a Russian invasion into Ukraine are far-reaching in many areas. The war is a humanitarian crisis. Thousands of people died, while millions fled the country. Ukraine was also severely hit economically. The GDP is forecasted to fall this year by 35% or even more on top of the vast destruction of the country’s infrastructure (the total amount of direct infrastructure damage has surpassed $100 billion), reduced labor supply, and halted investments. The Russian economy is projected to decline by 8.5% or even more due to the sanctions, financial crisis, and the closure of economic ties with the West, including the withdrawal of many companies from Russia. There is a global food crisis. Russia and Ukraine are significant producers of many agricultural products. They produce 60% of the world’s sunflower oil and account for almost 30% of wheat exports. Ukraine is also a leading exporter of corn, barley, and rye, but because of the war, many crop areas won’t be planted or harvested. What’s more, both Ukraine and Russia are also major producers of fertilizers. Additionally, because of the naval blockade, Ukraine’s ability to export its commodities is severely limited. The rise in food (and fuel) prices (see the chart below) could aggravate the food insecurity in some parts of the world, increasing the risk of unrest. There is a global energy crisis as well, as Russia is the second-largest producer of natural gas and the third-largest producer of oil. The EU is particularly severely hit as it is most dependent on Russian energy. The rise in food and energy prices is adding to the inflationary pressure and is hampering GDP growth. The war is a negative supply shock which is stagflationary in nature. The IMF has already cut its forecast for global growth this year from 4.4% to 3.6%, mainly because of the Russian invasion. The war will also have important long-term geopolitical consequences. The Russian invasion reenergized NATO, prompted Finland and traditionally neutral Sweden to apply for membership in this military alliance, and triggered an increase in military spending across all of Europe, including pacifist Germany. Moreover, Russia’s position will weaken, as its failure – despite the huge military advantage – to defeat Ukraine shows that, in reality, it’s a less powerful country than people feared. The huge military losses in terms of soldiers and equipment will weaken Russia’s military strength for years. What’s more, Europe is reducing dependence on Russian hydrocarbons, the major country’s leverage. Russia is effectively cut off from Western economic integration and will probably be driven into a closer and more subservient relationship with China. How Will This Affect Gold? OK, but what does it all mean for the global economy and the gold market? Well, we are experiencing higher inflation and slower economic growth, so we are moving closer to stagflation, which should support gold prices. The Russian invasion is also another blow to globalization and global supply chains, which increases the odds of permanent fragmentation of the world economy into geopolitical blocks, as known from the Cold War. Such changes in the global order would be negative for productivity, also leading to slower growth and higher prices. Compared to the pre-war reality, we live in a much less secure world. After all, there is an ongoing full-scale war on European soil. A “peace dividend” has ended, and military spending will have to go up, leading to slower growth in the standard of living. The rise in uncertainty should also increase demand for safe havens such as gold. On the other hand, because inflation is projected now to remain elevated for much longer, the central banks will be under pressure to tighten their monetary policies more decisively. The more aggressive Fed’s tightening cycle should be negative for gold prices, at least until it triggers a grave economic slowdown or even recession. What’s more, the war has more negative economic consequences for Europe, which is more dependent on Russian energy, than for the United States. Hence, the dollar should strengthen against the euro, negatively affecting gold prices. That’s true that the ECB is expected to join the club of monetary hawks, but given the war’s impact on economic growth, Lagarde can be more cautious with interest rate hikes than Powell, which should also support the greenback.

EUR/USD fail in sustains the upside trend momentum. The major pair broke a two-week trading range on Thursday. The momentum oscillator, like the Relative Strength Index, holds onto the oversold zone with no signs of corrections in the near term. The EUR/USD edged lower today in the initial New York session. The major pair broke a two-week trading range after hitting the June high at 1.0773 yesterday. At the time of writing, EUR/USD was trading at 1.0532, down (-0.7607%) for the intraday. Having said that, in a previous analysis, the downside potential had the upper hand for the European currency pair. However, the pair started its downside journey after it was able to break the support level of 1.0678, which was able to guard the price against falling too far. On the 4-hour chart, the major currency pair edges lower, back to levels last seen on May 20. Furthermore, the 21-period sustained trading below the 50-period on the Moving Average (MA) indicates more downside in the not-so-distant future. On the other hand, the Relative Strength Index (RSI) holds onto the oversold zone, recording 28 on the value line as the decrease in momentum still has a vacancy. The aforementioned formation indicates an extension of the current trend, and that will be the more likely scenario to occur. EUR/USD encounters the first hurdle around 1.0521. If a successful breach occurs at the previously mentioned hurdle, that would pave the way towards 1.0498, followed by 1.0460, which was last seen on May 18th. Alternatively, buyers should wait for a decisive breach of the 1.0545 resistance level to validate the upside potential. The sustains above the aforementioned level would open the door towards the 1.0572 resistance level, followed by 1.0597. exploding that level will bring us back to the critical resistance level at 1.0643.

If history is to repeat itself to some extent, junior miners have a chance to make minor corrections. However, is it worth leaving short positions now? Let’s take a look at what happened in junior mining stocks. In last Friday’s (June 3) Gold & Silver Trading Alert, I commented on Thursday’s rally in the following way: The price of the GDXJ ETF – a proxy for junior miners – moved sharply higher yesterday, and this got many people excited. High volume confirms that. It’s natural for most investors and traders to view rallies as bullish, but let’s keep in mind that most traders tend to lose money… It’s not that simple. After all, the best shorting opportunities are at the tops, which – by definition – can only be formed after a rally. The particularly interesting thing about high volume readings in the GDXJ ETF is that they quite often mark local tops. Remember the late-April – early-May consolidation? It ended when GDXJ finally rallied on high volume. That was the perfect shorting opportunity, not a moment to panic and exit the short position. The GDXJ-based RSI indicator is also quite informative right now. It moved well above 50, but it’s not at 70 yet. Why would that be important? Because that’s when many of the previous corrections ended. When one digs deeper, things get even more interesting. You see, when we consider corrections that started after the RSI was very oversold (after forming a double bottom below 30), it turns out that in all those cases, the tops formed with the RSI between 50 and 70. I marked those situations with blue ellipses on the above chart. So, while it’s easy to “follow the action,” it’s usually the case that remaining calm and analytical leads to bigger profits in the end. Also, let’s use yesterday’s move as something useful. If this single-day move higher made you really uncomfortable and almost made you run for the hills, it might be a sign that the size of the position that you have is too big. It’s your capital and you can do with it what you wish, but if the above were the case, it might serve as food for thought. The big trend (as well as the reasons for it) remains down, which means that the enormous profit potential remains intact. Last Friday’s and this week’s declines confirm the above. The high-volume rally marked the top – those who got excited at that time likely bought exactly or very close to the top, instead of shorting at that time. Fortunately, you were prepared. After taking profits off the table and closing short positions on May 12, we immediately entered long positions (it turned out that it happened right at the bottom), and we then took profits from that long position on May 26. Next, we returned to short positions. These positions are already profitable, but it seems that they will be much more profitable soon. Why? Most importantly, because history rhymes, we’re likely to see a repeat of 2012-2013 or the 2008 decline. So far, the current slide is in tune with the 2008 performance. However, let’s not dig into the long-term details yet. While we’re close to the short-term chart, let’s focus on what it features. For your convenience, here it is once again. The recent April-May decline doesn’t have to be repeated to the letter, but we could see something similar nonetheless. After all, that decline is the most recent analogy to what we’re about to see in the GDXJ (a massive decline). Based on the above, I marked two cases from the precious decline (the initial decline and the entire decline) and I copied them to the current situation, assuming that the recent top is indeed the starting point of the next bid decline (which seems likely in my view). It turns out that junior miners might need to decline to or slightly below the May lows before we see even a moderate corrective upswing. Will I want to trade this correction? Probably not. If we see a correction from below $35, it might be small – only a bit over $36, so it might be way too risky to trade this quick rebound. The downside (the bigger orange rectangle) is much bigger than the above, and it would be a much bigger waste to miss this move in order to try to catch a relatively small move. Besides, there’s also a chance that we won’t see any meaningful correction, just like what happened in 2020. Back in March 2020, after the corrective upswing, mining stocks fell like a stone in water. While the current price moves are less volatile, they are still somewhat similar (note the marked areas on the above chart). Moreover, please note that...

Key highlights The British public's expectations for the rate of inflation in a year's time have risen to their highest in records going back to 1999, a quarterly survey by the Bank of England showed. The public's median inflation expectation for 12 months' time rose to 4.6% in May, up from 4.3% in February's survey. Expectations for two- and five years' time rose to 3.4% and 3.5%, the highest since 2013 and 2019 respectively. Credit growth in China picked up in May, after the central bank leaned on the country's commercial banks to do more to support an economy suffering from COVID-19 lockdowns and a grinding real estate crisis. The People's Bank of China said Total Social Financing, grew by 2.79 trillion yuan after slumping to only 910 billion yuan a month earlier, when the key financial hub of Shanghai joined the list of regions and cities under COVID-19 lockdown measures. Japanese imports likely jumped in May at the fastest pace in six months, buoyed by surging raw material prices and the yen's decline to two-decade lows, a Reuters poll showed on Friday. Rising import costs are inflicting increasing pain on Japanese households and domestic-oriented firms, raising questions about the central bank's stance that the weak yen is beneficial to the economy overall. USD/INR movement The USDINR pair made a gap up opening at 77.7900 and traded within the range of 77.7850-77.8700. The pair closed the day at 77.8325 levels. The USDINR pair rose and touched its life time high levels today amid broad dollar strength. Elevated crude oil prices, FII outflows and surging US yields too kept the Indian rupee under pressure. The domestic Industrial output grew by 7.1% in April on better performance by power and mining sectors, as per government data released today. Global currency updates The annual pace of inflation in the US rose to 8.6% in May according to the latest Consumer Price Index data released by the US Bureau of Labour Statistics. The inflation print was above the expected reading of 8.3%. The Dollar index remained strong and rose above 104 levels after the release of higher than expected inflation print. The effect of broad dollar strengthening was seen in both the currencies as the Euro and Pound weakened and traded at 1.0524 and 1.2385 levels respectively. Bond market Short-term U.S. Treasury yields popped today, after the release of hotter-than-expected inflation data. The 2-year rate jumped more than 8 basis points to trade above 2.9%. The benchmark 10-year Treasury yield briefly rose and traded at 3.05%. Short-term rates moved more due to their higher sensitivity to Federal Reserve rate hikes. India 10-year benchmark bond yield too closed the day higher at 7.519%. Equity market Indian equity benchmarks Sensex and Nifty 50 suffered sharp losses following a gap-down start, as rate hike guidance from the ECB and upcoming US inflation data unnerved investors globally. Losses across sectors pulled the headline indices lower, with financial, IT and metal shares being the biggest drags. Broader markets also bore the brunt of overall weakness on the Street. The Nifty Midcap 100 and Nifty Smallcap 100 indices fell around one percent each. Evening sunshine "Focus to be on the ECB President Lagarde Speech due later today." European stocks fell further as investors reacted to the European Central Bank’s latest policy decisions and a hotter-than-expected U.S. inflation print. U.S. stock futures turned lower after fresh data showed that inflation accelerated in May. Heightened inflation is likely to put pressure on the Fed to lift interest rates quickly in an effort to temper rising prices. Fed officials are largely expected to raise the central bank’s key interest rate by half a percentage point next week and replicate that in July. Focus to be on the ECB President Lagarde Speech due later today.