Gold skyrockets as US inflation suggests Fed easing ahead

Gold price climbs, remaining above $2,700, ignoring high US yields.
US CPI data confirms ongoing disinflation, bolstering expectations for a Federal Reserve rate cut next week.
Market anticipates a potential rate cut, with swaps pricing a 92% likelihood, focusing next on upcoming PPI and jobless claims data.

Gold prices prolonged their uptrend on Wednesday following the release of inflation figures in the United States (US). Expectations that the Federal Reserve (Fed) would cut interest rates next week were reaffirmed as the disinflation process evolves, yet at a slower pace. The XAU/USD trades at $2,711, posting gains of 0.40%.

The US Consumer Price Index (CPI) remained firm in November, with headline and core figures aligned with economists' monthly and annual estimates, revealed the US Bureau of Labor Statistics (BLS).

US Treasury bond yields slipped, with the 10-year T-note coupon diving to a low of 4.201% before recovering to 4.24%, up one basis point. The US Dollar Index (DXY), which measures the performance of the American currency against a basket of six other currencies, rises by 0.29% to 106.68.

Following the data, the swaps market had priced 92% odds for a 25 basis points (bps) rate cut by the Federal Reserve. This would diminish the Fed funds rate to 4.25%-4.50% at the December 17-18 meeting.

Analysts at Goldman Sachs noted that China’s central bank “may even increase Gold demand during periods of local currency weakness to boost confidence in their currency.”

Now that CPI figures are in the rearview mirror, investors' focus will shift to the release of the Producer Price Index (PPI) and Initial Jobless Claims numbers for the week ending December 7.

Daily digest market movers: Gold price climbs ignoring high US yields

Gold prices advanced as US real yields rose two basis points to 1.958%.
The US Bureau of Labor Statistics (BLS) revealed that headline CPI was 0.3% MoM, a tenth high, but aligned with estimates. Core CPI was unchanged at 0.3% MoM, aligned with October and Wall Street projections.
In the twelve months to November, CPI was up from 2.6% to 2.7%, while core CPI was unchanged compared to October, as projected by the consensus at 3.3%.
Data from the Chicago Board of Trade, via the December Fed funds rate futures contract, shows investors estimate 24 bps of Fed easing by the end of 2024.

Technical outlook: Gold price resumes its bullish trend, eyes $2,721

Gold uptrend continues with prices clearing the $2,700 figure, yet Bullion remains below the November 25 peak of $2,721.

Momentum remains bullish, as portrayed by the Relative Strength Index (RSI). With that said, the XAU/USD remains bullishly biased.

Bullion’s first resistance would be $2,721. On further strength, the next stop would be $2,750, followed by the all-time high of $2,790.

Conversely, if XAU/USD tumbles below the 50-day Simple Moving Average (SMA) of $2,685, the next support would be the $2,650 figure. Once surpassed, the next support would be $2,600, followed by an upsloping support trendline and the 100-day Simple Moving Average (SMA) in the $2,580 to $2,591 area.

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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