Gold prices surge as US inflation cools

Gold prices surged on Thursday, rising to the $2,420 per ounce level. If gold prices rise, resistance may be encountered near $2,450 per ounce, while if gold prices decline, support may be encountered near $2,320 per ounce. 

Gold prices surged on Thursday as US inflation surprised on the downside. Headline inflation cooled to 3.0% year-on-year in June from 3.3% in May against expectations of a 3.1% reading. Monthly inflation shrank by 0.1% in June against the 0.1% growth expected. Core inflation, which excludes food and energy, rose by just 0.1% in June from 0.2% in May dropping below expectations of 0.1% growth. 

Gold prices are affected by central banks’ interest rates. A restrictive monetary policy hinders economic growth lowering the global economic outlook and putting pressure on gold prices. The US Federal Reserve kept interest rates unchanged at its policy meeting in June, within a target range of 5.25% to 5.50%, as expected. 

Signs that inflationary pressures are easing might induce the Fed to start cutting interest rates in September. Rate cut expectations in September were catapulted above 85% after the release of the US inflation report on Thursday, boosting gold prices. The uncertainty around Fed rate expectations is likely to continue in the coming months causing volatility in gold prices. 

Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar plummeted after the release of the US inflation report on Thursday and the dollar index dropped to the 104.3 level. US treasury yields also dipped, with the US 10-year bond yielding approximately 4.22%.           

Fed chair Jerome Powell testified on the Semi-Annual Monetary Policy Report before the US Senate Banking Committee on Tuesday and Wednesday. Powell stated that inflationary pressures in the US are easing and warned that keeping rates at restrictive levels for too long could weaken the economy, hinting at a rate cut in September. 

China's central bank, the People’s Bank of China has halted gold purchases for the second consecutive month. The Bank of China has been buying gold over the last 18 months and the sudden absence of an important buyer has been driving gold prices down. 

Gold prices have experienced a meteoric rise in the past few months and are trading in overbought territory. Geopolitical tensions raise the appeal of safe-haven assets boosting gold prices. Concerns that the crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets keeping gold prices high. 

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Written by:
Myrsini Giannouli

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