Gold drops as Fed rate cut bets ease after stubbornly higher US inflation data

Gold price delivers wild moves as US price pressures remain high in December.
Investors seem confident about the Fed reducing interest rates in March.
Fed policymakers continue to favor a restrictive policy stance.

Gold price (XAU/USD) turns volatile as United States Bureau of Labor Statistics (BLS) has reported hotter-than-projected Consumer Price Index (CPI) data for December. Annual headline inflation accelerated to 3.4% against expectations of 3.2% and the former reading of 3.1%. In the same period, the core CPI that excludes volatile food and oil prices at 3.9% remained higher than expectations of 3.8% but was lower than the prior release of 4.0%. Monthly headline and core inflation grew by 0.3%. The impact of a slightly higher inflation data would be nominal on bets in favor of rate cuts from the Federal Reserve (Fed) in March.

The appeal for bullions may fade slightly as investors' confidence over the Fed reducing interest rates in March has waned a bit after a higher inflation data. Investors have been ignoring that Fed policymakers continue to lean towards keeping a restrictive stance for a longer period, denying the likelihood of early rate cuts.

Atlanta Fed Bank President Raphael Bostic and New York Fed President John Williams supported the idea of keeping interest rates higher as they said more work is needed to get inflation back to the 2% target. John Williams said it would only be appropriate to unwind the current restrictive monetary policy stance when the Fed is confident that inflation is moving toward 2% on a sustained basis.

Daily digest market movers: Gold price turns volatile after higher US CPI report

Gold price trades volatile around $2,030 as the United States inflation data for December remains higher-than-projected.
Higher inflation data will offer an argument to Fed policymakers to keep interest rates high for the entire first half of this year.
The Federal Reserve (Fed) is highly expected to keep interest rates unchanged in the range of 5.25%-5.50% in January’s monetary policy meeting for the fourth time in a row. Guidance about upcoming interest rate cuts will be of utmost importance.
In the latest projections, Fed policymakers said interest rates could come down by 75 basis points (bps) this year.
Bets supporting an interest rate cut by the Fed in March have declined as the US inflation report has comes in hotter than projected.
As per the CME Fedwatch tool, chances in favour of a 25 bp rate cut in March have dropped to 60%.
Projections for the first cut in interest rates could shift to May’s monetary policy meeting as US labor market conditions are still upbeat.
Going forward, investors will shift focus towards the Producer Price Index (PPI) data for December, which will be published on Friday.
On US-China relations, US Treasury Secretary Janet Yellen said former Republican President Donald Trump’s plan to levy universal 10% tariffs on all imports would escalate costs for consumers. She added that a review of tariffs on Chinese imports is highly needed.

Technical Analysis: Gold price fails to get firm-footing above $2,030

Gold price is reflecting wild movements around $2,030 after the release of the sticky inflation report. On a daily timeframe, the precious metal has been struggling to extend its recovery above the 20-day Exponential Moving Average (EMA) at $2,037. The 14-period Relative Strength Index (RSI) oscillates around 50.00, which indicates that investors await a potential trigger for further action.

(This story was corrected on January 11 at 15:00 GMT to say, in the first paragraph, that expectations for annual core CPI were 3.8%, not 3.9%.)

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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