Gold prices surge on soft US inflation print

Gold prices climbed to their highest level since May on Thursday, as soft US inflation print put pressure on the dollar. Gold prices climbed above the $1,877 per ounce resistance, touching $1,900 per ounce. If gold prices continue to increase, further 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 plummeted later on Thursday and the dollar index dropped to the 102.1 level on cooling US inflation. 

US Treasury yields also fell sharply on Thursday on reduced Fed rate hike expectations, with the US 10-year bond yielding approximately 3.44%. 

US CPI data released on Thursday were this week’s most highly anticipated fundamentals. Although the US inflation print on Thursday was in line with expectations, the dollar crashed after the release of the CPI data. US inflation seems to be cooling, as US headline inflation dropped to 6.5% year-on-year in December from 7.1% in November. The soft inflation print boosted gold prices on Thursday, as cooling price pressures may give the US Federal Reserve some leeway towards scaling back its interest rate increases. 

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.

Increased global recession concerns, however, raise the appeal of gold as an investment. In China, prolonged Covid lockdowns have dealt a significant blow to the economy. A diminishing economic outlook may force central banks around the world to pivot to a more dovish fiscal policy. 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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