- Gold extends gains, trading at $2,433, just below the all-time high of $2,450.
- Softer US inflation report boosts bets on Fed rate cuts with 76% odds for a September reduction.
- Investors anticipate two rate cuts by year-end, potentially lowering the Federal funds rate to 4.75%-5.00%.
Gold price extended its gains on Monday, yet it trades slightly below the all-time high of $2,450 reached during the Asian session amid increasing expectations that major central banks, including the Federal Reserve, might ease policy during 2024. The XAU/USD trades at $2,433, up 0.80%.
Market sentiment is a mixed bag, though slightly positive, with the S&P 500 and NASDAQ 100 gaining, while the Dow Jones is almost flat. This and last week’s softer-than-expected consumer inflation report in the United States (US) boosted bets that the Fed could slash borrowing costs as soon as September, according to CME FedWatch Tool data.
Odds that the Fed would cut rates by 25 bps in September are at 76%. Investors have begun to price in two cuts toward the end of the year, which would leave the fed funds rate at 4.75%-5.00%.
In the meantime, Federal Reserve (Fed) speakers would dominate the US economic docket during the week before the latest Fed meeting minutes were released on Wednesday. On Thursday, US Initial Jobless Claims are expected to show the labor market is cooling, along with the Chicago Fed National Activity Index.
Daily digest market movers: Gold price trends higher despite hawkish Fed commentary
- Gold price advances despite higher US Treasury yields and a weaker US Dollar. The US 10-year Treasury note yields 4.437% and is up one-and-a-half basis points (bps) from its opening level. DXY gains 0.06% to 104.55.
- Last week’s inflation data showed that underlying prices are easing. That reignited traders’ expectations that the US central bank would resume easing policy. However, they must be cautious as Fed officials pushed back against just one reading that inflation is moderating.
- Earlier, Fed speakers grabbed the headlines. First, Atlanta Fed President Raphael Bostic said that policy is restrictive and that it would take a while before they could be certain that inflation is headed to 2%. Vice-Chair Michel Barr echoed his words, noting the Fed will need to keep rates higher to “allow tight policy” to continue to do its work.
- Recently, Vice-Chair Philip Jefferson said it’s too easy to tell when the disinflation process will resume while stating that the policy rate is restrictive.
- As of writing, Cleveland Fed President Loretta Mester approved the latest CPI data and added that the risks of being “too restrictive” had gone down, while inflation risks are tilted to the upside.
Technical analysis: Gold price hits $2,450 as bulls target $2,500
Gold prices remain set to test higher prices after hitting a new all-time high of $2,450, which could open the door to further gains. Traders should know that momentum supports buyers as the Relative Strength Index (RSI) continues to aim higher but is not yet at overbought readings.
If XAU/USD breaches the all-time high, the next stop would be $2,475, followed by the $2,500 mark.
Conversely, if XAU/USD retreats below $2,400, that could expose the May 13 low at $2,332, followed by the May 8 low of $2,303. Once those levels are surpassed, the 50-day Simple Moving Average (SMA) at $2,284 will be up next.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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