The recent gold price rally hit a snag on Wednesday after a key U.S. inflation report hinted at a delay in potential interest rate cuts by the Federal Reserve. This news sent a wave of caution through the market, causing gold prices to retreat.
Interest Rate Hikes Put Gold on Ice
Spot gold prices dipped by 0.6%, reaching $2,354.80 per ounce by mid-afternoon EDT, falling below the crucial $2,350 mark. U.S. gold futures mirrored this decline, slipping 0.3% to $2,354.80 per ounce.
The pullback coincides with the release of U.S. government data on Wednesday, revealing a 0.4% increase in the core consumer price index (CPI). This measure, closely tracked by economists, is considered a reliable indicator of underlying inflation. The core CPI has now climbed 3.8% year-over-year.
The hotter-than-expected inflation data suggests that interest rates may remain elevated for a longer period. This, in turn, diminishes the appeal of non-interest-bearing assets like gold. Following the inflation report, both U.S. Treasury yields and the dollar strengthened, causing gold prices to tumble as much as 1.4% to $2,320.12 per ounce.
Gold Still Gleams Despite Dip
Despite the recent pullback, gold remains perched at elevated levels. Notably, the precious metal achieved record highs for eight consecutive trading sessions, reaching a peak of $2,365.35 per ounce on Tuesday. Since mid-February, gold prices have enjoyed a near 17% surge.
The recent gold rally had puzzled some analysts due to the lack of clear triggers, especially with diminishing expectations of multiple U.S. interest rate cuts this year. However, heightened geopolitical tensions in the Middle East and Ukraine, coupled with increased buying by central banks, particularly China, provided some bullish momentum for gold.
Investors Shift Focus, Correction Looms
Ole Hansen, head of commodity strategy at Saxo Bank AS, suggests that some investors are shifting their focus “from the number of rate cuts to sticky and rising inflation,” which has partially supported gold prices.
However, Hansen anticipates a short-term correction in gold prices due to the rapid price increase in a short timeframe. A dip below $2,230 could potentially trigger a wave of selling by long-term investors.
The future trajectory of gold prices will likely hinge on a delicate balance between inflation data, Federal Reserve policy, and investor sentiment. If inflation remains stubbornly high, the Fed might be forced to maintain higher interest rates for longer, potentially dampening gold’s luster. However, escalating geopolitical tensions or a renewed flight to safety by investors could reignite the gold rally.
Source: Mining.com
