Gold prices volatile as US inflation cools

Gold prices were volatile on Wednesday, on signs of cooling US inflation. Gold prices skyrocketed to $1,925 per ounce after the release of the US PPI data but pared some of their gains later in the day. If gold prices continue to increase, resistance may be encountered near $2,000 per ounce, while if gold prices decline, support may be found near $1,825 per ounce.

Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar declined on Wednesday on soft US inflation data, with the dollar index dropping to 101.5, before bouncing back to 102.4. US Treasury yields declined slightly on Wednesday, with the US 10-year bond yielding approximately 3.3%. 

US PPI data on Wednesday fell below expectations, driving the dollar down. US inflation seems to be cooling, as Producer Price Index declined by 0.5% in December, versus estimates of a 0.1% drop. In addition, November’s PPI print was revised to reflect a 0.2% increase, instead of the original 0.3% to 0.2%.

US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. The soft inflation print put pressure on the dollar and gold prices soared, as cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases. Gold prices are approaching overbought territory though, as they trade close to levels reached only after the crisis in Ukraine started last year.

Increases in central banks’ interest rates put pressure on gold prices since assets yielding interest become a more appealing investment compared to gold as interest rates rise. Several major Central Banks, such as the Fed, the ECB, and the BOE raised interest rates considerably in the past year. A worldwide wave of fiscal tightening has been driving gold prices down.

As the Fed and other central banks start to scale back their aggressive rate hiking, gold prices surge. Gold has been in a bullish trend for the last couple of months, which is likely to continue if the Fed signals a pause in raising interest rates. Even though inflation rates remain high, signs of cooling price pressures have reduced rate hike expectations, providing support for gold prices.

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Written by:
Myrsini Giannouli

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