Gold price rallies on soft US Inflation report

  • Gold price moves sharply higher as US inflation data softens more than expected in October..
  • A nominal decline in inflation may keep hopes of a changed interest rate policy unabated.
  • Various Fed policymakers are scheduled to speak today.

Gold price (XAU/USD) rose sharply as the US Consumer Price Index (CPI) data for October has turned out gradually softer than expectations. Monthly headline CPI remained stagnant against expectations of a 0.1% rise and a 0.4% growth in September. In the same timeframe, the core inflation rose by 0.2%, slower than expectations and the former reading of 0.3%. On an annual basis, the headline inflation softened to 3.2% versus. the consensus of 3.3% and a 3.7% reading in September. The core CPI slowed nominally to 4.0% against the estimates and the prior reading of 4.0%.

The precious metal jumps while the US Dollar plunges as the Federal Reserve (Fed) may deliver a neutral monetary policy outlook. However, the Fed is committed to bringing down inflation to 2% in a timely manner and it won’t hesitate to raise rates further if it thinks inflation has become entrenched.

After a soft US inflation report, Richmond Fed Bank President Thomas Barkin said that the central bank is making real progress on inflation but is not convinced inflation is on a smooth glide path to 2%. Barkin warned that the Fed needs to do more to curb demand and inflation.

Daily Digest Market Movers: Gold price rallies on weak US Dollar, yields

  • Gold price jumps sharply to near $1,960.00 as inflation slows in October at a faster pace than expected.
  • The precious metal capitalizes on nominl decline in inflation data as Federal Reserve policymakers may not strongly advocate for raising interest rates further.
  • US headline inflation softened significantly in October due to a sharp fall in global oil prices, which resulted in lower revenues at gasoline stations.
  • A decline in US inflation may dampen the expectations of one more interest rate increase from the Fed at its December monetary policy meeting or in the early start of 2024 further.
  • As per the CME Group Fedwatch tool, traders see a 15% chance of the Fed raising interest rates by 25 basis points (bps) at the December meeting and a 25% chance at the monetary policy meeting in January 2024.
  • The odds for further rate-tightening edged higher as Fed Chair Jerome Powell along with his colleagues remain unsure about whether current interest rates are adequate to bring down inflation to 2% last week.
  • Jerome Powell warned that a failure to control inflation by the Fed would be a big mistake. Therefore, the central bank won’t hesitate to tighten monetary policy further.
  • Investors will focus on speeches from Fed policymakers: Michael Barr, and Austan Goolsbee ahead.
  • The US Dollar Index (DXY) plunges to near 104.80 amid hopes that the Fed is done with hiking interest rates, prompted by soft inflation report. 10-year US Treasury yields plummeted to near 4.48%. Before the release of the US CPI data, Fed Vice Chair Philip N. Jefferson said that some measures of economic uncertainty, particularly for inflation, are elevated.
  • This week, investors will also focus on the monthly US Retail Sales data for October. As per the consensus, consumer spending is forecast to have contracted by 0.3% against 0.7% growth in September.
  • Meanwhile, with no significant escalation in Middle East tensions appeal for bullion has diminished. 

Technical Analysis: Gold price jumps above $1,960

Gold price recovered vertically after the release of the soft US inflation data. The yellow metal has recovered to near 20-day Exponential Moving Average (EMA), which trades around $1,960. A sharp upside move in the precious metal is prompted by a significant decline in headline inflation data.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

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