Gold rises to a monthly high as the dollar weakens

Gold remained at an uptrend on Thursday, crossing the key $2,700 mark and rising above $2.720 per ounce for the first time in over a month. If gold prices rise, they may encounter resistance at $2,700 per ounce, while if gold prices decline, support may be encountered near $2,640 per ounce. 

Gold prices are driven by opposing forces. Increased safe-haven demand due to geopolitical tensions is driving gold prices up. In addition, the recent uncertainty surrounding President-elect Donald Trump’s proposed trade tariffs is driving investors towards safe assets. On the other hand, however, the Fed’s recent hawkish shift is putting pressure on gold prices. 

US inflation data this week came in lower than anticipated, indicating that disinflation in the US is progressing, which may affect the Fed’s rate outlook. After the release of lower-than-expected PPI data on Tuesday, soft Consumer Price Index (CPI) data on Wednesday boosted gold prices. Headline inflation rose by 2.9% year-on-year in December from 2.7% in November, which was in line with expectations. Monthly inflation rose by 0.4% in December against 0.3% in November, as expected. Core CPI, however, which excludes food and energy, rose by just 0.2% in December following a 0.3% rise in November and against expectations of a 0.3% print. Core CPI rose 3.2% year-on-year in December, below estimates for a 3.3% increase and November’s 3.3% gain. 

Producer Price Index (PPI) data on Tuesday surprised on the downside, indicating that US inflation is easing, boosting gold prices. PPI rose by 0.2%, in December, falling short of expectations of a 0.4% print and following a rise of 0.4% in November. Core PPI, which excludes food and energy, came in flat against expectations of a 0.2% rise and following a rise of 0.2% in November. PPI climbed 3.3% year-on-year in December, falling below expectations of 3.4% but rising above November's 3.0% print. Core PPI came in at 3.5% annually, falling short of expectations of a 3.8% print but above November’s reading of 3.4%.

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 continued to decline on Thursday, with the dollar index dropping from 109.1 to 108.9 on disappointing US economic data. US treasury yields dipped, putting pressure on the dollar, with the US 10-year bond yield dropping from 4.66% to 4.62%. 

Last week, conflicting reports on US President-elect Donald Trump’s future economic measures caused turmoil in markets. The uncertainty surrounding Trump’s proposed tariffs boosted gold prices, as Trump’s risky economic plans raised the demand for safe-haven assets. 

Trump will take office next week on January 20 and his proposed tariffs could potentially ignite trade wars. In addition, Tramp’s plans may reignite inflationary pressures. Concerns that global inflation may rise are propping up gold prices. 

Gold prices are under pressure by decreased Fed rate cut expectations. The US Federal Reserve cut interest rates by 25 basis points at its latest meeting to a target range of 4.25% to 4.50%. Fed Chair Jerome Powell delivered a hawkish speech after the meeting, emphasizing the need to be cautious about further rate cuts. Powell stated that the Fed’s approach will remain data-driven and hinted that the pace of future rate cuts will be slower. 

Safe-haven demand remains high, due to uncertainty in the Middle East, boosting gold prices. Reports that Israel and Hamas have reached a ceasefire agreement put pressure on gold prices on Thursday, however. Meanwhile, the situation between Russia and Ukraine remains critical.

This week important US economic data releases are likely to cause volatility in gold prices. US inflation data in particular are likely to affect the Fed’s rate outlook and are eagerly awaited by traders. Producer Price Index (PPI) data is due on Tuesday, and more importantly Consumer Price Index (CPI) data on Wednesday will show if inflationary pressures in the US remain high. Wednesday’s inflation report is expected to show that headline inflation rose by 2.9% year-on-year in December from 2.7% in November, indicating that the progress of disinflation is slow.

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Written by:
Myrsini Giannouli

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