Gold prices experienced a notable decline on Thursday, following a brief surge that brought the precious metal to $4,374, just shy of its all-time high of $4,381. This movement came in response to the release of a weaker-than-expected US Consumer Price Index (CPI) report, which indicated easing inflation. At the time of writing, gold (XAU/USD) is trading at approximately $4,335, as traders opted to lock in profits after the recent gains.
The CPI report revealed that inflation has fallen to its lowest level since early 2021, according to data from the US Bureau of Labor Statistics. The headline CPI in November rose by 2.7% year-on-year, down from 3.0% in September and below market expectations of a 3.1% increase. The core CPI, which excludes food and energy prices, also decreased, falling to 2.6% year-on-year from 3.0% previously. Despite the positive inflation news, economists expressed concerns that the ongoing government shutdown, which has lasted for 43 days, could compromise the reliability of the CPI data.
Investors had anticipated that the soft inflation data might increase the likelihood of a rate cut by the Federal Reserve. However, market reactions remained lukewarm as traders viewed the data cautiously, particularly in light of solid employment figures from the latest Initial Jobless Claims report, which indicated a decline to 224,000 claims for the week ending December 13.
Capital Edge data suggests that expectations for a rate cut at the Fed’s next meeting on January 28 remain unchanged at 24%. Nonetheless, investors are factoring in a potential 60 basis points of easing for the year, with the first cut anticipated in June 2024. This outlook is expected to exert pressure on the US Dollar, providing some support for gold prices.
Geopolitical factors also play a role in the current gold market dynamics. Easing tensions could limit gold’s upward momentum, particularly as discussions between the US and Russia are set to resume this weekend in Miami, according to Politico.
Market Reactions and Technical Analysis
The recent CPI data prompted a cautious response from gold traders, leading to a retreat from near two-month highs. As traders assessed the inflation figures, gold’s bullish momentum appeared to wane. The Relative Strength Index indicates that gold has slipped from overbought territory, suggesting a potential consolidation phase.
If XAU/USD closes below the $4,350 level on a daily basis, the next support level is anticipated at $4,300. Should prices breach this support, further declines could expose the December 11 high of $4,285, with additional support levels at $4,250 and $4,200.
In related news, physical gold exports from Switzerland to India decreased sharply, dropping 15% in November to just 2 metric tons, the lowest level since February. This decline is attributed to increased prices. In contrast, shipments to China, another significant gold consumer, rose to 12 tons in November, up from 2 tons the previous month.
US Treasury yields have also shown a downward trend, with the 10-year benchmark note rate falling three basis points to 4.12%. Real yields, which typically move inversely to gold prices, dropped four basis points to 1.88%. Meanwhile, the US Dollar Index, which measures the dollar’s performance against a basket of six currencies, is slightly up at 98.43.
Factors Influencing Gold Prices
Gold has historically been viewed as a safe-haven asset, especially during periods of economic uncertainty and inflationary pressures. The precious metal is not only prized for its aesthetic appeal in jewelry but is also seen as a hedge against inflation and currency depreciation. As it does not depend on any specific issuer or government, gold retains its allure during turbulent times.
Central banks are significant players in the gold market. They often diversify their reserves by increasing gold holdings, which can enhance the perceived strength of their economies. In 2022, central banks added a record 1,136 tonnes of gold, valued at approximately $70 billion, to their reserves, as reported by the World Gold Council.
Gold’s price is influenced by various factors, including geopolitical stability, interest rates, and the performance of the US Dollar. A weakening dollar typically results in higher gold prices, as investors seek to offset currency risks through gold investments.
As traders and investors navigate the current economic landscape, gold remains a focal point for those seeking stability amidst ongoing financial volatility. Moving forward, the upcoming release of the Core Personal Consumption Expenditures Price Index and the University of Michigan Consumer Sentiment Index will be crucial in shaping market expectations and gold pricing.
